NU Online News Service, Sept. 24, 3:04 p.m.EDT

NATIONAL HARBOR, MD–A reevaluation of insuranceregulators' use of rating agencies is needed because their poorperformance helped prompt the financial crisis, a regulator andconsumer advocate testified today.

Their comments were made at a meeting session of the NationalAssociation of Insurance Commissioners whose members employ ratingagency evaluations to determine insurer risk-based capitalrequirements.

Rating agencies were called to the session to explain theiractivities.

The Rating Agency Working Group held a three-parthearing–chaired by Illinois Insurance Director Michael McRaith andco-chaired by New York Superintendent James Wrynn–to learn howregulators came to rely on rating agencies, what went wrong, andwhat to do in the future.

New York Deputy Superintendent Michael Moriarty testified thatearlier in this decade, because of its limited resources, theNAIC's Securities Valuation Office sought to enhance itseffectiveness by leveraging off ratings and valuations alreadyprovided by third parties, such as rating agencies.

As part of regulators' reliance on rating agencies, Mr. Moriartysaid, the SVO exempted insurers from filing all rated securitieswith the office. If the security was rated by anationally-recognized rating organization, the company did not haveto file it with the SVO, he noted.

The SVO relied on rating agencies, Mr. Moriarty explained, tomake effective use of its limited resources. "The rationale at thattime was fairly straightforward," he said, noting that ratingagencies had a track record of reliability, with only a fewblips.

However, he said this reliance should be reviewed in light ofthe events of the last few years, which have seen the collapse ofhighly rated residential mortgage backed securities and otherderivatives, events that have led to investor lawsuits against theagencies as well as congressional criticism.

In addition California Attorney General Edmund G. Brown Jr. hasannounced he has subpoenaed Standard & Poor's, Moody'sInvestors Service and Fitch Ratings to investigate whether thefirms violated California law when they "recklessly" gave "stellarratings to shaky assets."

Birny Birnbaum, executive director of the Center for EconomicJustice consumer organization, criticized regulators for"delegating authority to private enterprises." He said consumergroups in general are troubled by the fact that regulators handedoff a critical public role to rating agencies.

He said rating agencies got it wrong on mortgage-backedsecurities, and if they were wrong before, there is no reason tobelieve they are right now, even though they have since downgradedthose securities.

He also criticized insurers for urging regulators to rely onratings for mortgage-backed securities when those securities wererated "AAA," but urging regulators to ignore the lower ratings nowin some cases as they are causing what insurers see as excessiverisk-based capital requirements.

Eric Steigerwalt, senior vice president and chief financialofficer of Metropolitan Life Insurance Company, defended insurerrequests for a review on the downgrades by stating that regulatorsshould require higher limits of capital for bonds with a highprobability of loss, but lower limits of capital for bonds thathave been downgraded but have a low probability of loss.

SVO Managing Director Chris Evangel testified that the SVO couldconceivably rate securities that are currently evaluated by therating agencies–but the cost would be high.

He said it would require a "sea change" at the SVO as far ascost and resources. Such a change would be beneficial in downmarkets, he added, but not necessarily in up markets. He also saidsuch a change would require time to execute.