While extreme events occur infrequently, their outcomes can be devastating with serious implications to individuals, financial institutions, governments, and society in general. In the context of this proposal, an extreme event could be from a single event or from multiple correlated events that place a company in dire financial straits. Often plans are developed and implemented to minimize the risks associated with these types of events. For example, a company may be able to quantify some extreme event risks well enough so that exposure to those risks can be managed by holding additional capital. The purpose of this research is to investigate and identify strategies companies can employ to minimize, mitigate and/or manage the risks of extreme events including reinsurance, financial reinsurance and methods for assessing an appropriate capital charge for a company's exposure to extreme event risks. While these extreme events will apply to all companies and approaches should be generally applicable, the researcher is encouraged to provide specific examples demonstrating the techniques within the insurance industry.

The researcher is to perform a study that identifies some of the strategies companies employ or could employ to minimize, mitigate, and/or manage the risks of extreme events. Some of the issues the SOA is interested in follow:

1. How to recognize potential dependent events that could lead to an extreme event;
2. How to aid or train management to recognize when they are managing in Mediocristan (business as usual, no extreme events considered) and Extremistan (they accept that extreme events will happen, and will manage accordingly) as discussed in Nassim Nicholas Taleb's book, The Black Swan;
3. How to determine which possible extreme events need to be targeted;
4. How management may anticipate how other competitors or the market may react to specific events and use that knowledge to create their own response;
5. How reinsurance can be used for managing extreme event risk.
6. How to determine which events can be easily mitigated by changing corporate behavior (e.g. using disinfectants to reduce the chance of the impact of a pandemic), changing risk acquisition practices (e.g. underwriting for HIV), transferring risk (e.g. financial reinsurance contracts), succession planning and/or disaster recovery planning;
7. How to collect both external and internal data to determine if a Key Risk Indicator (KRI) or Key Performance Indicator (KPI) can be used in a dashboard to aid in the management of identified potential extreme events;
8. How to prepare management to be able to react to issues in a timely manner (dry runs) instead of firefighting; and
9. How to aid management to recognize when specific issues cannot be mitigated but must resort to the holding of additional capital to improve the likelihood of solvency after an extreme event occurs.
10. Best methods for assessing an appropriate capital charge for a company's exposure to extreme events risk within its capital model such as:

• What possible methods are available to estimate the risk exposure and the related loss probabilities;
• How to determine if the extreme event should be modeled as a single occurrence or a cascading set of events. For instance, in handling corporate law suits, a staged model could be considered. The first stage would be to model the probability and impact of settling out of court, probability and impact of going to court, probability and impact of being found liable etc.
• How should extreme dependent scenarios be modeled and used in the design of the risk model;
• How to have conversations with management to consider using and looking at the results of models based on severe and extreme events, even if the likelihood of such events are very low. These conversations should also consider what management considers being severe scenarios vs. extreme. Consider a severe scenario being one that a company can absorb the impact from once or twice before placing the financials in dire straits. The conversations can also aid in planning for more frequently occurring events (e.g. fire or snow storm).
• How to create conversations with management to determine the collective risk aversion (or appetite) regarding an extreme event. Using these results identify methodologies to help set the capital limit.
• Identify methods that will aid in the aggregation/allocation of this risk model within the company's overall capital model. How does aggregation and allocation interact between various risks and consider market complexity? Does it consider resiliency testing using severe or extreme scenarios? How flexible is this component of the capital model? Discuss the interaction between risks and how to model them so that the company is able to avoid using aggregation techniques across risk silos and simple assumptions (such as linear correlation) that do not have a second or third order interaction.
• Identify the data and data collection considerations. How does and/or should the data flow into a company? Is there data sharing between companies that could be mutually helpful?

A budget of $50,000 (U.S.) has been established for the project. The researcher(s) is to examine one or more of the above issues and summarize the results in a report made available to SOA membership. Since the bidders may propose different issues to be addressed in the study, it is feasible that more than one researcher/research team could be hired for the project.

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. Identification of the issues the researcher(s) will address in the study.
2. 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.

3. 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.

4. 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.

5. A schedule for completion of the research, identifying key dates or time frames for research completion and report submission.
6. 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).
7. Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed.

The Reinsurance Section is responsible for the selection of the proposal to be funded. Input from other knowledgeable individuals also may be sought, but the Reinsurance Section will make the final decision. The SOA's Research Actuary will provide staff actuarial support. A Project Oversight Group (POG) will be appointed to participate in the proposal review process and to oversee the project upon selection of the proposal.

Any questions regarding this RFP should be directed to: 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 20, 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 February 3, 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).