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Research

Research Studies–Proposal Requests

The Subprime Mortgage Crisis and Lessons for Insurers

1. Background and Purpose

Subprime lending refers to providing loans to home purchasers who do not qualify for market interest rates because of risk characteristics such as their income, amount of loan, credit history, and other related factors. This practice escalated as housing prices significantly increased earlier this decade. It led many to assume higher risk mortgages that they were led to believe could be refinanced later on better terms, making use of the expected appreciation in house values. However, once housing prices started to drop in 2006, and as default rates increased, it triggered what has become known as the subprime mortgage crisis.

In the past year, the subprime mortgage crisis has been the subject of extensive media coverage. As the crisis manifested itself, more and more players in the global economic system felt the impact. Among those players, insurers, to varying degrees, become subject to the effects of the crisis and are still feeling them today. With this in mind, the Society of Actuaries' Committee on Finance Research and Risk Management Research Team are interested in exploring what lessons can be learned from the crisis for insurers and how to mitigate the impact of it and such events in the future.

2. Research Objectives

The Society of Actuaries' Committee on Finance Research and Risk Management Research Team are seeking researchers to evaluate and gauge the impact of the subprime mortgage crisis on insurers and what can be learned from it for future financial and risk management. The organizers of this request for proposals envision a report that will address the following questions:

1. What were the root causes of the subprime mortgage crisis?
2. What factors led to insurers' exposure in these markets and what risk metrics can be used to measure the exposure?
3. What risk metrics can be used to measure the extent of the insurer's exposure?
4. How extensive is the ongoing problem and expected duration for insurers?
5. What procedures, process or related information may have been problematic and contributed to the exposure?
6. What types of enterprise risk management strategies may have been incorporated to help avoid the past situation?
7. What types of enterprise risk management strategies could be implemented to mitigate future similar events, such as below investment grade instrument risk?
8. What are the overall lessons for insurers from the subprime mortgage crisis?

 

Through a comprehensive and thorough review of these questions, the report would benefit both insurers and those interested in a grounding of the issues related to the subprime mortgage crisis. It would also be helpful, if possible, to include consideration of the impact and alternatives to the reserve financing market.

3. Proposal

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

1. Resumes of the authors, 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 author is involved for each report, 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 authors as well as for the firm or institution on whose behalf the proposal is submitted.
2. An outline of the approach to be used. Details should be given regarding the manner in which appropriate published material will be identified and evaluated, search techniques to be used, collateral material to be consulted, and possible limitations of the review and analysis.
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. Other related factors that give evidence of a proposer's capabilities to perform in a superior fashion should be detailed.

 

4. Selection Process

The SOA's Committee on Finance Research and Risk Management Research Team are responsible for the selection of the proposal to be funded. Input from other knowledgeable individuals may also be sought, but the SOA's Committee on Finance Research and Risk Management Research Team 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 upon selection of the proposal.

5. Questions
• Any questions regarding this RFP should be directed to:
• Steven Siegel, SOA Research Actuary at ssiegel@soa.org
• ph: 847.706.3578
• f: 847.273.8578
6. Notification of Intention to Submit Proposal

If you intend to submit a proposal, please e–mail written notification by November 15, 2008 to:

• Barbara Scott, SOA Research Administrator, bscott@soa.org
• Society of Actuaries
• 475 N. Martingale Road, Suite 600
• Schaumburg, IL 60173–2226
• ph: 847.706.3592
• f: 847.273.3592
7. Submission of Proposal

Please e–mail a copy of the proposal to Barbara Scott at bscott@soa.org

Proposals must be received no later than December 1, 2008. It is anticipated that all authors who have submitted proposals will be informed of the status of their proposal in January 2009.

Note: Proposals are considered confidential and proprietary.

8. Conditions

The SOA 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 SOA also reserves the right to redirect the project as is deemed advisable.

The SOA 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 SOA. However, appropriate credit will be given to the researcher(s).