Fair value accounting requires that liabilities are reported based on the amount at which the liability could be settled for in a market transaction. Since there are generally not quoted prices in an active market for insurance liabilities, this is generally determined based on cashflow projections using current market assumptions.

Various accounting regimes that utilize current market assumptions are similar but not necessarily identical, including FAS 133 and FAS 157 under U.S. GAAP, Market Consistent Embedded Value, and proposed Insurance Contract standards under IFRS. These methods may expose companies to increased financial statement volatility compared with historical U.S. statutory and GAAP accounting approaches, particularly during turbulent markets.

In addition, some of the traditional risk management techniques used by insurance, including reinsurance and hedging, have different accounting implications under a fair value or related regime. As such, companies have sought out various ways to reduce this volatility, including hedging, reinsurance, captives, product design and other methodologies.

The purpose of this project is to educate actuaries and other interested parties on the mitigation strategies available and their effectiveness.

The objective of the research is to perform a study to identify methodologies currently in use by life insurers as well as potential new strategies to manage balance sheet and income volatility risk associated with fair value and related accounting. The researcher(s) should perform at a minimum the following:

• A review of existing research on this topic;
• An analysis of balance sheet and income volatility for several companies over the last few years, focusing on levels and drivers of volatility including stochastic projections, if any for next "x" years results;
• An analysis of company disclosures, including information disclosed, accounting policies and risk mitigation techniques;
• A review of analyst reports for views on the techniques;
• If necessary, discussions with management at the selected companies; and
• An evaluation of the relative effectiveness and costs of these techniques

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

• An overview of fair value and related accounting, how it is being used within a company, and the associated volatility in the liability and impact on earnings;
• A summary of the risk mitigation techniques (by accounting regime if applicable), their relative costs and effectiveness, and strategic objectives currently being used by companies and their prevalence within the life insurance industry;
• An evaluation of the strength and weaknesses of the volatility mitigation techniques currently used, including a discussion of their relative effectiveness under various economic conditions; and
• A summary of other strategies companies could consider.

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 including interim reporting progress, identifying key dates or time frames for research completion and report submission.
5. Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed.

The SOA's Financial Reporting Section Council 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: Ronora Stryker, SOA Research Actuary, by email (rstryker@soa.org), or fax (847.273.8514).

If you intend to submit a proposal, please send written notification by January 6, 2012 to Jan Schuh, SOA Sr. Research Administrator, by email (jschuh@soa.org), fax (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 13, 2012. It is anticipated that all researchers who have submitted proposals will be informed of the status of their proposal no later than February 28, 2012.

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).