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Research Studies–Proposal Requests

Request for Proposal–Stochastic Pricing For Embedded Options In Life Insurance And Annuity Products

1. Background

Life and annuity products have incorporated new options; e.g. secondary guarantees in universal life and variable life products, return of premium in term products, guaranteed minimum death benefits and guaranteed living benefits in variable annuity products, and surrender options in payout annuities. For many of these options, pricing assumes that the policyholder will not be efficient in electing these options. Regardless, new methods of pricing for these options need to be developed.

The availability of personal computers with high processing speeds and grid computing is making it possible to generate large numbers of projections over numerous economic and underwriting scenarios. These modeled scenarios typically result in contingent distributable earnings flows (trees–on–trees) that can be aggregated together to not only determine some average profit measure but also to describe the distribution/variability of such measure; thereby, measuring the “risk” of the product offered by the company. As time is money, efficient stochastic analysis is important.

2. Purpose

The purpose of this project is to create reference material that addresses the educational needs of practicing actuaries.

3. Research Objective

The objective for this project is to develop a stochastic pricing methodology for embedded options for at least one life insurance product and one annuity product. The researcher will perform a literature review of existing studies on stochastic pricing for life insurance and annuity products. Utilizing this information as well as original research, the researcher will determine the stochastic analysis needed for the embedded options chosen. The researcher will summarize their findings and application of the methodology in a report that consists of but is not limited to:

1. An overview of the embedded options found in basic life insurance and annuity products including discussing the associated risks of each feature.
2. A presentation of the two products and options included in the study
3. A discussion of the nature of stochastic analysis for at least those embedded options included in the two products selected for the study such as:
   1. When should a stochastic vs. deterministic analysis be performed?
   2. How are the parameters determined?
   3. How does the nature of the embedded option or combination of options impact the nature of the stochastic analysis. For example, how is the number and type of scenarios included in the stochastic analysis dependent on the number and type of embedded option, if any.
4. An outline of the pricing methodology and its development
5. A discussion of the practical application of the methodology to insurers utilizing the assumed two products and a comparison and illustration of this method to traditional actuarial pricing techniques employed in the industry for assumed options. In addition, considerations in implementing such a pricing methodology should also be discussed.

4. Proposal

To facilitate the evaluation of proposals, the following information should be submitted:

1. Resumes of the researcher(s), including any graduate student(s) expected to participate, indicating how their background, education, and experience bear on their qualifications to undertake the research. If more than one researcher is involved, a single individual should be designated as the lead researcher and primary contact. The person submitting the proposal must be authorized to speak on behalf of all the researchers as well as for the firm or institution on whose behalf the proposal is submitted.
2. An outline of the approach to be used, emphasizing issues that require special consideration. Details should be given regarding the techniques to be used, collateral material to be consulted, and possible limitations of the analysis.
3. Cost estimates for the research, including computer time, salaries, report preparation, research costs, etc. Such estimates can be in the form of hourly rates, but in such cases, time estimates should also be included

Any guarantees as to total cost should be given and will be considered in the evaluation of the proposal. While cost will be a factor in the evaluation of the proposal, it will not necessarily be the decisive factor

4. A schedule for completion of the research, identifying key dates or time frames for research completion and report submissions.
5. Ideas regarding the form and distribution of the final report, both for immediate release and for permanent reference (e.g., submission to North American Actuarial Journal or other refereed publication, TSA Reports, SOA Monograph Series, CD ROM).
6. Other related factors that give evidence of a proposer’s capabilities to perform in a superior fashion should be detailed.

5. Selection Process

The SOA’s Product Development Section Council (PDSC) is responsible for the selection of the proposal to be funded. Input from other knowledgeable individuals also may be sought, but the PDSC will make the final decision. The SOA’s Research Actuary will provide staff actuarial support. A Project Oversight Group (POG) will be appointed to oversee the project upon selection of the proposal.

6. Questions

Any questions regarding this RFP should be directed to:

Ronora Stryker, SOA Research Actuary

ph: 847.706.3614

f: 847.273.8514

7. Notification of Intention to Submit Proposal

If you intend to submit a proposal, please send written notification to:

Jan Schuh, SOA Research Administrator

Society of Actuaries

475 N. Martingale Road, Suite 600

Schaumburg, IL 60173–2226.

ph: 847.706.3556

f: 847.706.3599

8. Submission of Proposal

Please e–mail a copy of the proposal to Jan Schuh.

Proposals must be received no later than January 31, 2007. It is anticipated that all researchers who have submitted proposals will be informed of the status of their proposal no later than March 1, 2007.

Note: Proposals are considered confidential and proprietary.

9. Conditions

The Society of Actuaries reserves the right to not award a contract for this research. Reasons for not awarding a contract could include, but are not limited to, a lack of acceptable proposals or a finding that insufficient funds are available to proceed. The Society of Actuaries also reserves the right to redirect the project as is deemed advisable.

The Society of Actuaries intends to copyright and publish the results of this research. The research will be considered work–for–hire and all rights thereto belong to the Society of Actuaries. However, appropriate credit will be given to the researcher(s).

If you intend to submit a proposal, please send written notification by January 19, 2007 to:

Jan Schuh, SOA Research Administrator

Society of Actuaries

475 N. Martingale Road, Suite 600

Schaumburg, IL 60173–2226.

ph: 847.706.3556

f: 847.706.3599