"It is being researched now. We have barely started down the road," NAIC President Roger Sevigny noted this fall.
However, those fearful of having the NAIC delving deeper into their balance sheets and cross-examining them about corporate strategies before issuing potentially devastating ratings should take heart, because nothing happens quickly at this snail-like organization.
Indeed, while slow but steady may have won the race for the tortoise over the hare, no one ever won money betting on the NAIC completing a task sooner rather than later. Consider the fact that after a decade of debate, the agency this month finally approved the "framework" of a new collateral scheme for foreign reinsurers. That means while regulators have committed to the concept at last, there is still the matter of implementation to attend to.
Mr. Sevigny, New Hampshire's insurance commissioner, conceded there are a number of key questions to address before considering whether to go ahead with such an ambitious project--including fundamental queries like: "Can we do it?' and "Would the SEC be likely to sign off?"
Still, the notion of the NAIC going head-to-head with A.M. Best, Fitch, Moody's and Standard & Poor's is quite intriguing.
Beyond the questions cited by Mr. Sevigny, many others should be asked before the NAIC gives this initiative the green light. (See the accompanying infographic.) And if the organization does proceed, how would it pull off its scheme?
Industry reaction was mixed. Most insurer organizations were laying low, not eager to offend their members' regulators, and probably figuring (hoping?) this whole idea would eventually fade away into standard NAIC policymaking oblivion.
Readers posting on my Oct. 27 blog entry, in which I expressed some enthusiasm for the concept, were more openly skeptical.
One reader suggested an alternative to launching a new firm: "They could simply purchase one of the existing rating agencies. This would eliminate the issue of diluting the pool of talent and would get them into the game in a short period of time."
Another blog reader was adamant that "creating a rating agency is an absolute conflict of interest, and nothing but another means for the NAIC to increase its budget base." A third respondent said "the NAIC already has a rating agency. It's called the Securities Valuation Office."
Another reader had a dire warning: "This is a lovely idea that won't work. The reason is the NAIC could never assign a rating below 'Excellent' to a carrier, which would cause a run on the bank."
Explaining their point further, this reader noted that "any entity that depends on the confidence of the buyer--whether an insurer or a banker or a stockbroker--cannot continue to function if its reputation is tainted. If the NAIC intends to cull the herd, this proposal will surely accomplish that result."
The first reader quoted here got to the crux of the bigger issue challenging rating agencies and all those who depend on them to serve as an early warning system about insurer financial distress: "The real question is does anyone have a model that is accurately predicting the probability of loss far enough in advance that it allows a regulator to take action?"
