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Market Volatility Risk for Insurance Company Portfolios and Related Hedging Strategies

Background and Purpose

Several recent instances of unprecedented events have driven periods of market volatility. An example in early 2021 was the soaring stock price of GameStop as millions of small investors, informed by social media, drove up the stock price and delivered large losses to short sellers.  On a broader scale, the COVID-19 effect on the economy and markets is another prominent example as is the potential impact of global warming.  Taking a macro view, these events raise a fundamental question:  Are these isolated, unique events or are we seeing new trends that will drive market volatility in the future? In either case, what impact may this volatility have on insurance companies and their portfolios and how can such risks be hedged in the future?  Can a hedge be implemented that reduces risk and improves the return profile of the business?

Research Objective

The Committee on Finance Research (CFR) is seeking researchers to explore whether we are witnessing new trends driven by predictable risk factors or just instances of random, unique events that could lead to significant market volatility in the future. In turn, how could this volatility impact insurance company investment portfolios?  With this in mind, the following are examples of proposed areas for exploration that are of interest to the organizers:

  • What market volatility events are observable in the historical record, and what if any patterns can be identified that have implications for today/the future?
  • To what extent do advances in technology drive instances of volatility? For instance, does increased access for small investors to new trading technologies have an impact on volatility?
  • Are there objective approaches for assessing whether there are new trends in volatility or just isolated, random instances? Can the underlying drivers of such volatility be identified and quantified?  Are risks to such drivers hedgeable?
  • How do these volatility events, whether part of a trend or not, change thinking and approaches to investment and hedging strategies for insurance companies and their portfolios?
  • What other safeguards (regulatory or otherwise) can be identified to mitigate some of the risks of market volatility?

Note that the above list is not meant to be exhaustive but merely examples of proposed topics that may be researched.

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 (e.g. literature search, model, etc.), 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. A description of the expected deliverables and any supporting data, tools or other resources.
  4. Cost estimates for the research, including computer time, salaries, report preparation, material 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 submissions. The CFR is interested in completing this project in a timely manner.  Suggestions in the proposal for ensuring timely delivery, such as fee adjustments, are encouraged.
  6. Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed.

Selection Process

The CFR will appoint a Project Oversight Group (POG) to oversee the project.  The CFR is responsible for recommending the proposal to be funded.  Input from other knowledgeable individuals also may be sought, but the CFR will make the final recommendation, subject to SOA leadership approval. The SOA's Research Actuary will provide staff actuarial support.

Questions

Any questions regarding this RFP should be directed to Steven Siegel, SOA Research Actuary (phone: 847-706-3578; email:  ssiegel@soa.org.    

Notification Of Intent To Submit Proposal

If you intend to submit a proposal, please e-mail written notification by August 15, 2021 to Barbara Scott.

Submission Of Proposal

Please e-mail a copy of the proposal to Barbara Scott.

Proposals must be received no later than September 15, 2021. It is anticipated that all proposers will be informed of the status of their proposal by the end of October 2021.

Note: Proposals are considered confidential and proprietary.

Conditions

The selection of a proposal is conditioned upon and not considered final until a Letter of Agreement is executed by both the Society of Actuaries and the researcher.

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. The Society of Actuaries also reserves the right to redirect the project as is deemed advisable.

The Society of Actuaries plans to hold the copyright to the research and to publish the results with appropriate credit given to the researcher(s).

The Society of Actuaries may choose to seek public exposure or media attention for the research.  By submitting a proposal, you agree to cooperate with the Society of Actuaries in publicizing or promoting the research and responding to media requests.

The Society of Actuaries may also choose to market and promote the research to members, candidates and other interested parties.  You agree to perform promotional communication requested by the Society of Actuaries, which may include, but is not limited to, leading a webcast on the research, presenting the research at an SOA meeting, and/or writing an article on the research for an SOA newsletter.