Questions Due Friday December 2 on Research RFP on Credit Risk Actuarial Methodologies
- Casualty Actuarial Society (CAS) 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, funded research activities, and other means. The membership of the CAS includes over 4,600 actuaries employed by insurance companies, industry advisory organizations, national brokers, accounting firms, educational institutions, state insurance departments, the federal government, and independent consultants. Additional information about the CAS can be found at www.casact.org.
- Credit Risk Section / Committee on Valuation, Finance, and Investments
The Credit Risk Special Interest Section (CRiSIS) serves the following purposes: promoting discussion and the exchange of ideas, among members and subscribers, on the subject of credit risk evaluation; providing forums for such discussions to take place; advancement of the knowledge of actuarial science as applied to credit risk through both original research and surveys of members’ and subscribers’ collective knowledge; and promotion of good fellowship among its members and subscribers.
The Committee on Valuation, Finance, and Investments (VFIC) is charged with providing direction, guidance, and support to the profession, regulators, and others regarding valuation and financing of property and casualty risks and investments. The Committee is also responsible for monitoring and coordinating activities with other organizations or CAS committees working in areas related to property and casualty valuation, finance, and investments.
CRiSIS and VFIC will sponsor the research to be conducted under this RFP on behalf of the CAS.
- CAS Interest in the Subject
Following the recent credit crisis, it became clear that two major factors contributing to the crisis were mispricing of mortgage credit risk and excessive amounts of correlated credit risks, at major financial institutions. Presumably, risk management was taking place at a high level, with considerable staff resources and the latest technology deployed to manage credit risk at several of those institutions. However, the way that risk was measured and managed appears to contrast with standard methods and approaches that property-casualty actuaries use to manage risk. Particular examples include over-reliance on data that lacks full credibility, reserving that would not meet actuarial standards, capital allocation below that which would be produced by actuarial methods, and concentration measurements under stress scenarios.
Thus it appears that the application of the property-casualty methodologies to management of credit risk, particularly mortgage credit risk, in ways analogous to their long-tested application in property-casualty insurance, may help prevent a crisis in the future and provide more adequate financial security to institutions that employ such methods. In order to facilitate discussion, a theory and model of the actuarial approach is needed, containing the components currently practiced in the property-casualty context, applied to mortgage credit risk measurement and management. Existing methods developed by casualty actuaries for mortgage insurance provide an established foundation. The theory can be applied more generally to credit risk, as a proposed model. Applications of the theory to other types of credit risk through further research may be possible.
- Research Problem Description
The goal is to describe the general US P&C actuarial approach to mortgage credit risk management, by surveying knowledgeable CAS members and consolidating their responses. Identified members will be asked how they would apply an “actuarial approach” if they had risk management responsibility for mortgage credit risk, primarily in the context of mortgage insurance. Other mortgage credit risk contexts (e.g., bonds, other investments including derivatives, reinsurance) may also be considered provided actuarial methods have been applied by the survey respondents. Risk from both an individual transaction perspective and from a portfolio perspective should be considered. Results will be made anonymous. The investigator will work with CRiSIS members to collect answers into a paper that summarizes main elements of the actuarial approach, in the form of a description and a model. The resulting draft report of the actuarial approach will be put through a peer-review process and may be submitted to a journal, and to wider-audience publications to publicize actuarial approaches and principles, to stimulate broader discussion.
- Project Requirements
CRiSIS and VFIC request proposals from qualified researchers to: i) identify CAS members with the appropriate knowledge, ii) obtain source material from identified CAS members and the researcher on application of the P&C actuarial approach to mortgage credit risk management, iii) collaborate with CRiSIS members to consolidate the source material and summarize the main elements of the P&C actuarial approach as applied to the study’s mortgage credit risk context, iv) demonstrate application of these elements in a model, and v) produce a report of the results. The report should include Excel spreadsheets or R code that can by used by other researchers to perform similar analyses using the model or a variation of it.
Proposals should include a clear outline of the work that will be performed and the time frame in which it will be performed (including key dates). The more specific the proposal covers the goals the better. A cost estimate or range should accompany each proposal.
The proposal should address the following:
- Methods to be used to identify CAS members with the relevant knowledge, and to obtain source material from them
- Data to be used
- Actuarial methods known to the researcher to be included, and how the methods would be applied to pricing, reserving and capital allocation for mortgage credit risk
- Spreadsheets, programming code and other practical work products that can be distributed with the research paper
This proposal will be reviewed in conjunction with the attached Research Agreement which defines the terms and conditions under which the work is performed.
The proposal should be accompanied by the resumes of the researcher(s), indicating how their background, education, and experience bear on their qualifications to undertake the research.
Respondents should demonstrate their interest in and familiarity with the literature on the evaluation of mortgage credit risk and P&C actuarial methods, by including a resume (if a firm, of the principal consultant(s) performing or directing the work) showing relevant work/research experience and professional accomplishments (e.g., papers published).
Receipt of proposals will be acknowledged in a timely manner. All decisions regarding the evaluation of responses to the RFP will be awarded entirely based on the information provided in the written proposals. The CAS will award the contract to the respondent who, in the judgment of CRiSIS and VFIC, is best able to perform the work as specified herein. If CRiSIS and VFIC determine that no proposal meets the requirements of the RFP, then no contract will be awarded.
When a respondent is chosen by VFIC and the contract awarded, respondents not awarded the contract will be so informed shortly thereafter.
Interested researchers should submit their proposals and any questions in writing to:
Casualty Actuarial Society
Attention: Chairperson, VFIC
4350 N. Fairfax Dr. Suite 250
Arlington, VA 22203
Phone: (703) 276-3100
Fax: (703) 276-3108
The proposals will be reviewed by members of a subcommittee of CRiSIS and VFIC.
- Proposed Schedule
December 2, 2011
Deadline for questions (must be written) from researchers regarding the RFP.
December 19, 2011
All written questions together with their answers will be distributed to all proposers.
January 9, 2012
Proposal deadline - end of business day
January 31, 2012
Proposal selection by CRiSIS and VFIC Draft Report and Final Report due date to be decided by researcher and included in proposal
The respondes(s) should specify the funding requested for the research and should supply support for the requested funding. The reviewers will consider the thoroughness of the research, as well as the extensiveness of the functionality that will be incorporated into the credit risk web resource by the researchers. Payment of award(s) will be contingent upon delivery of an acceptable research product.
- Presentation, Ownership and Publication of Report
If asked, the researcher(s) agree 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 Section 8. The researcher(s) are also encouraged to make sample calculations available in spreadsheets or code for a widely used analytical language such as R.
As a condition of selection, the CAS requires that all right, title, and interest, including copyright and patent, in and to the report be owned by the CAS. The selected researcher must sign a formal Agreement (attached) that assigns all such rights to the CAS. Of course, in any publication of the report, the researcher will receive appropriate credit. The CAS may publish the report in any CAS publication, including electronic versions such as on its Web site or on compact discs.
- Research Agreement
A standard research agreement will be provided to the researcher(s).