Casualty Actuarial Society

Research

Researcher(s) Wanted

November, 2001

Note: Researchers have been chosen for this project and work is underway.

Casualty Actuarial Society
Committee on Theory of Risk
Dynamic Financial Analysis Committee
and the
Society of Actuaries
Committee on Finance Research

Researcher(s) Wanted for Proposed Research Project on
Modeling of Economic Series
Coordinated with Interest Rate Scenarios

  1. Society of Actuaries
  2. The Society of Actuaries (SoA) is an educational, research, and professional organization dedicated to serving the public and SoA members. Its mission is to advance actuarial knowledge and to enhance the ability of actuaries to provide expert advice and relevant solutions for financial, business, and societal problems involving uncertain future events. The vision of the Society of Actuaries is for actuaries to be recognized as the leading professionals in the modeling and management of financial risk and contingent events.

    The SoA was organized in 1949 as a merger of the Actuarial Society of America, founded in 1889, and the American Institute of Actuaries, founded in 1909. The membership of the SoA includes over 16,000 actuaries working in life insurance, retirement systems, health benefit systems, financial and investment management, and other newly emerging practice areas. The SoA Committee on Finance Research (COFR) manages and governs all research activities related to financial and investment management.

  3. Casualty Actuarial Society (CAS)
  4. The CAS was organized in 1914 as a professional society with the purpose of advancing the body of knowledge of actuarial science applied to property, casualty and similar risk exposures. This is accomplished through communication with the publics affected by insurance, the presentation and discussion of papers, attendance at seminars and workshops, collection of a library, research, and other means. The membership of the CAS includes over 3,000 actuaries employed by insurance companies, industry advisory organizations, national brokers, accounting firms, educational institutions, state insurance departments, the federal government and independent consultants.

  5. Committee on Theory of Risk (COTOR)
  6. The Committee on Theory of Risk is charged with developing and demonstrating the utility of specific applications of the theory of risk to various lines of property and casualty insurance. The COTOR and the Dynamic Financial Analysis Committee are jointly sponsoring this research on behalf of the CAS.

  7. Dynamic Financial Analysis Committee (DFAC)
  8. The Dynamic Financial Analysis Committee was formed by the CAS in 1998 by merger of the DFA Modeling Task Force of the Valuation, Finance, and Investments Committee and the DFA Task Force on Variables of COTOR. Its charge is to further the CAS initiative on DFA by promoting dissemination of knowledge pertinent to DFA and promoting the use of DFA in practice.

  9. CAS and SOA Interest in the Subject
  10. The topic of appropriate modeling techniques for generating economic scenarios in a DFA model or in a cash flow test is extremely important to actuaries. A key part of DFA modeling is the reasonable representation of future economic indices, to model asset and liability risks. In cash flow testing, plausible future scenarios must be created to include or be consistent with plausible values of a variety of economic indices. A standardized approach to this problem would be an important step in providing guidance to practicing actuaries.

  11. Statement of the Problem
  12. DFA is a technique used by actuaries to project the future financial position of an insurance entity. DFA modeling strives to represent the complete distribution of financial values along with a best estimate. DFA techniques have many uses such as solvency testing, capital budgeting and developing reinsurance structures.

    A key part of DFA modeling is the representation of future economic conditions and the impact of those conditions on asset, liability and income values. In order to model appropriately changes in financial values the actuary requires a way of projecting future economic indices. It is also important that these indices be projected in such a way as to reflect the appropriate interdependencies between the values, so that, for example, interest rates and inflation rates move together in a reasonable manner.

    The goal of this project is to provide actuaries a model for projecting economic indices with realistic interdependencies among the variables. The indices included will ultimately be the decision of the researcher but should include, at a minimum, variables representing:


    1. Long Term Interest Rates

    2. Short Term Interest Rates

    3. Shape of Yield Curve

    4. Stock Market Price Levels – Large Cap

    5. Stock Market Price Levels – Small Cap

    6. General Inflation Rate

    7. Medical Inflation Rate

    8. Wage Level Inflation

    9. Real Estate Price Levels

    10. Unemployment Rate (optional)

    11. Economic Growth Rate (optional)

    Besides being able to do a realistic joint simulation of these variables, the model should also have the capability of imposing a deterministic scenario on one or more variables and simulating the others in a manner consistent with that scenario. This is to accommodate use of the model in cash flow testing.

  13. Project Outline
    1. Literature Survey: The research should include a comprehensive survey of the literature from actuarial, as well as econometric and any other relevant sources, for any research relating to this issue. The researcher will be expected to compile a bibliography of such research.
    2. Presentation of Model: The research findings should include a presentation of the model in full detail readily adaptable for use, with parameter estimates and accompanying statistics. Interdependencies or the mechanisms inducing them should be described in full detail. There should also be discussion of how the parameter set can be modified to represent extreme economic conditions. This presentation will become the property of the sponsoring organizations to be exposed to their membership as they see fit.
    3. Estimation and Updating: The above findings should be supported with a full account of estimation procedures and associated diagnostics sufficient to establish the statistical validity of the model. This should also include a description of data and procedures for updating the model. At its discretion, the CAS may also commission bulletins updating the model for use of the membership.
    4. The primary work product will be a comprehensive report encompassing a., b., and c. above and suitable for posting on the CAS website and for unrefereed publication in the CAS Forum.
    5. The project will also include writing a paper, suitable for publication in the CAS Proceedings, which presents in readable form the matter discussed in b. and c. above.
    6. The researchers are also encouraged to publish the research in other journals in order to elicit comment from outside the actuarial community.
    7. The project may include a review of the implications of the procedure(s) with respect to the determination of risk-based capital and the actuarial pricing of insurance.

  14. Research Funding
  15. Funding for this research is principally through the CAS and SOA but may include other research funding organizations. The amount of funds available for this project has not been determined at this time. The final scope of the project will be decided by the committee based on the research costs for various items and the expected results of the project.

  16. Researcher Qualifications
  17. Interested researchers should submit their resumes (if a firm, of the principal individual(s) performing or directing the work), indicating how their background, education, and experience bear on their qualifications to undertake this research. Specifically, researchers should specify their qualifications and expertise to perform research in the application of finance, statistics and actuarial theories to insurance and economic problems. Researchers should indicate their relevant work or research experience and professional accomplishments (e.g. papers published).

    In addition, researchers should supply a discussion of their proposed approach to the problem. This discussion should address the project goals presented in Section 6. If any of said goals cannot be achieved, the researcher should state that explicitly. The researcher should also address separately each of the requirements listed in Section 7 indicating intention to comply or any reservation or limitation to compliance.

    Finally, researchers should prepare a preliminary cost estimate for the work described.

    The CAS and SOA will select the researcher or researchers, who, in the judgment of the selection committee, and on the basis of his or her qualifications and expertise, is best able to perform the research project as outlined above. If COTOR/DFAC/COFR determine that no researcher is suitably qualified to perform this research project, then no contract will be awarded.

    Interested researchers should submit their qualifications and any questions in writing to the attention of:

    Philip E. Heckman
    Casualty Actuarial Society
    1100 N. Glebe Road, Suite 600
    Arlington, VA 22201
    Phone: (703) 276-3100
    Fax: (703) 276-3108
    office@casact.org

    Receipt of submissions will be acknowledged. Members of a joint oversight task force of COTOR, DFAC, and COFR will evaluate the researchers' qualifications.
    The current membership of the COTOR includes:

    Philip E. Heckman, Chairperson

    David Appel
    John G. Aquino
    Ward M. Brooks
    Louise A. Francis
    James R. Garven
    Farrokh Guiahi
    Nasser Hadidi

    Leigh Joseph Halliwell
    Charles N. Kasmer
    Donald F. Mango
    Stephen J. Mildenhall
    Prakash Narayan
    David J. Pochettino
    Shaun S. Wang, Ph.D.

    The current membership of DFAC is:

    Charles C. Emma, Chairman

    Manuel Almagro Jr.
    John G. Aquino
    Donald F. Behan
    Roger W. Bovard
    Thomas P. Conway
    Richard Derrig
    Owen M. Gleeson
    Steven J. Groeschen

    Philip E. Heckman
    Betty-Jo Hill
    Eduardo P. Marchena
    Glenn G. Meyers
    Raymond S. Nichols
    Marc B. Pearl
    Mark R. Shapland
    Peter G. Wick

  18. Tentative Project Schedule (Details negotiable)
  19. May 1, 2001

    Publish RFP

    July 1, 2001

    Qualifications due from researchers

    August 15, 2001

    Final selection of research team

    October 15, 2001

    Progress reports due from researchers

    December 15, 2001

    Progress reports due from researchers

    January 15, 2002

    Final research results and report due

  20. Presentation, Ownership and Publication of Report
  21. The selected researcher(s) will be required to sign the attached consulting agreement, which defines the terms and conditions under which the work is performed.

    If asked, the researcher(s) agrees to be available to present the report at a CAS meeting or seminar. If travel is required, reasonable expenses will be paid in addition to the compensation provided in the research contract.

    The CAS and SOA intend to copyright the research and to publish it in appropriate journals. The researcher(s) will also be encouraged to publish the work in a refereed academic journal (e.g. Journal of Risk and Insurance) in order to elicit the widest possible comment and recognition. It is intended that the results of the research can be used freely by any interested party. The research will be considered work-for-hire and all rights thereto belong to the CAS and SOA. However, appropriate credit will be given to the researcher(s).

    Guidelines for submitting papers for publishing in the CAS Proceedings are as stated on the CAS Web Site at http://www.casact.org/about/index.cfm?fa=guides, and in the CAS Yearbook.

  22. Additional Information (attached)
  23. Consulting Agreement