Corporate planning professionals, ALM professionals, Appointed Actuaries, pricing actuaries, and ERM professionals project financial results and capital levels for use by companies as well as rating agencies and regulatory bodies. One of the simplest and often unquestioned assumption in these projections is the credit loss or credit default assumption. However, historical experience indicates that companies are more likely to fail as a result of credit events than as a result of interest rate events, and such events are not captured in simple default assumptions. This assumption many times affects both income through investment income and capital through capital losses/gains, and the potential methods for developing these assumptions are quite diverse. As the industry becomes more sophisticated in understanding credit losses, the projections used by these professionals may or may not reflect the same level of sophistication.

The purpose of this project is to educate actuaries and other interested parties on the latest research on credit losses and defaults as well as the current actuarial practices around modeling credit losses.

The objective of the research is to survey current practice of life insurers with respect to actuarial modeling of credit losses and to evaluate current practice in light of most recent available research on credit losses and asset defaults. The research should analyze the factors/variables that affect credit risk and evaluate the effectiveness of the common modeling approaches in capturing those factors in projecting credit losses.

The study should address such questions as:

• Are deterministic methods adequate, or are stochastic capital loss models necessary for some modeling purposes?
• Are different approaches to credit losses appropriate for different modeling objectives?
• What are the strengths and weaknesses of the commonly used sources of historical default data used to develop assumptions?
• In practice, many companies sell troubled assets at losses before they default - what is the implication on direct use of default data in setting credit loss assumptions?
• To what extent should company-specific experience be used in setting assumptions?
• How should capital loss assumptions vary by economic scenario?
• How should concentration risk be reflected?
• How should liquidity risk be reflected?
• Should credit loss projections reflect a security's time since issue?
• How, if at all, should past changes in credit ratings be reflected?

The output should be in the form of a written report suitable for publication on the SOA's website which includes at a minimum:

• A summary of results of the survey of current modeling practice
• A summary of relevant existing research into credit loss modeling
• An evaluation of the strengths and weaknesses of current modeling practices in light of the available research

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:

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 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.

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 submission.
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, 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.

The SOA's sponsoring committees are responsible for the selection of the proposal to be funded. Input from other knowledgeable individuals also may be sought, but the sponsoring committees 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.

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
September 9, 2011 to:
Jan Schuh
SOA Research Administrator
Research Actuary
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 September 16, 2011. It is anticipated that all researchers who have submitted proposals will be informed of the status of their proposal no later than October 31, 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).