As financial intermediaries, banks and insurance companies have much in common. In a broad sense, both engage in borrowing and lending activities. Both assume risks (financial and/or non-financial) on behalf of their customers, which is the fundamental source of their profits. Both are subject to extensive, complex and sometimes patchwork regulation to ensure solvency and protect consumers. The industries are hardly homogeneous, with the types of products and services offered varying widely from institution to institution, as well as the types of institutions offering these products and services.

In the U.S., the insurance and banking industries are subject to significantly different regulatory environments and capital requirements, and have developed significantly different risk management practices. In part, these differences have arisen from fundamental differences in the types of products provided and the types of risks assumed within the two industries, but in part these differences can be considered historical artifacts. In Canada, insurance and banking regulation are much more similar and integrated, with the same federal agency responsible for regulating both industries. By studying and comparing the financial failure experience for the two industries in the two countries, it may be possible to identify best practices from one industry which could be applied to the other.

The purpose of this project is to advance the understanding among actuaries and other interested parties of the key factors contributing, either positively or negatively, to financial soundness and risk management in the insurance industry. The information presented should educate actuaries, banking professionals, and other interested parties on the relative differences in managing risks between the insurance and banking industries and assist actuaries, banking professionals and others in refining risk management practices to help prevent future financial failures. In addition, results of the research will assist the American Academy of Actuaries' Risk Management and Solvency Committee in furthering its efforts.

The overall research objective is to identify factors that have been effective for either industry in reducing failure experience. To achieve this overall objective, two separate objectives are required.

The first research objective is to measure historical rates of financial failure in the U.S. and Canadian banking and insurance industries. This objective would include defining a comparable measure of the failure experience that considers: 1) what constitutes "failure" (e.g. bankruptcy, receivership, etc.); 2) relative number of institutions that have failed in each industry; 3) relative number of consumers affected by failure in each industry; 4) actual dollar cost to consumers; 5) actual dollar cost to the regulatory system, including state guaranty funds and public deposit insurance providers; and 6) implications of failures within a holding company structure. The measurement period should be a long-term (no less than 20 year) period that includes the recent financial crisis.

In the above paragraph, "consumer" is meant to be clients of the banks/insurance companies that have failed. The definition does not include individuals who purchased the stock of these companies and were affected financially when the stock value of the companies declined.

The second objective is to identify and quantify the drivers/root causes that contribute to any observed differences in failure experiences. Such drivers/root causes could include, but are not limited to the following: regulatory structure; differences in approaches to rating credit quality and claim paying ability; differences in capital requirements; different triggers for regulatory action for troubled companies; differences in liability testing requirements; differences in risk management practices. The analysis should determine, in a quantitative and statistically valid way, those factors which most significantly contribute (favorably or unfavorably) to differences in failure experience.

The definition of the insurance and banking industries are intentionally undefined in the RFP with the hope that unique ideas will be proposed. In defining these industries for this project, a balance needs to be struck between a desire for breadth and a need for comparability. This Request for Proposal anticipates that: 1) the research would examine both U.S. and Canadian experience; 2) Insurance industry would include life insurers, but exclude health insurers and property/casualty insurers; and 3) The banking industry would include savings banks, credit unions, commercial banks, and investment banks, under either federal or state/provincial charter.

The output should be in the form of a written report which includes at a minimum:

• A summary of the research performed, approaches utilized, and assumptions made in conducting the study. The summary will include the definition of banking and insurance industries assumed for the study as well as the failure experience measure(s) utilized in the study.
• Quantitative comparison of the failure experience between the two industries;
• Root cause analysis of the failure experience and identification of a list of key factors that might contribute to differences in the failure experience; In summarizing the results include the methodology used in performing the root cause analysis.

It is expected that the researcher(s) will work closely with a Project Oversight Group (POG) in meeting the objectives of the project. The researcher(s) will also provide the POG with periodic progress reports. Members of this group will be available to provide feedback and guidance to the researcher(s) as needed.

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

• 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.
• An outline of the approach to be used, emphasizing issues that require special consideration. Details should be given regarding the manner in which appropriate published material will be identified, search techniques to be used, collateral material to be consulted, and possible limitations of the review and analysis. Time periods proposed to be examined should be noted in this outline.

  Proposals should clearly include the intended defininitions for the insurance and banking industries to be used for the study as well as the failure experience measure(s) for the study. Some guidelines have been provided in Section III above to help the researcher(s) develop these descriptions. To the extent the definitions are not consistent with the guidelines provided in Section III above, the researcher(s), should explain the rationale for the variation.

• 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.

• A schedule for completion of the research, identifying key dates or time frames for research completion and report submission.
• 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, SOA Monograph Series, CD ROM).
• Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed.

The SOA's Committee on Life Insurance Research (CLIR) is responsible for the selection of the proposal to be funded. Input from other knowledgeable individuals also may be sought, but the CLIR will make the final decision. The SOA's Research Actuary will provide staff actuarial support. A Project Oversight Group (POG) will be appointed by the RSC to oversee the project upon selection of the proposal.

Any questions regarding this RFP should be directed by fax or email to:

Ronora Stryker, SOA Research Actuary
email: rstryker@soa.org
f: 847.273.8514

If you intend to submit a proposal, please send written notification by December 30, 2010 to:

Jan Schuh, SOA Research Administrator
email: jschuh@soa.org
f: 847.273.8556

Please email a copy of the proposal to:

Jan Schuh at jschuh@soa.org

Proposals must be received no later than January 14, 2011. It is anticipated that all researchers who have submitted proposals will be informed of the status of their proposal no later than February 11, 2011.

Note: Proposals are considered confidential and proprietary.

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).