NU Online News Service, Oct. 8, 4:01 p.m.EDT

The National Association of Insurance Commissioners is preparingto vote on a proposal that would end regulators' exclusive relianceon rating agencies for determining risks associated with insurers'residential mortgage backed securities investments.

The proposal, said Michael Moriarty, deputy superintendent ofthe New York State Insurance Department, would have the NAICcontract with vendors to evaluate the risks. Several analyticalfirms, including BlackRock, Inc., PIMCO, and others, have met withthe NAIC and indicated they could complete the necessary workbefore the NAIC's Dec. 31 deadline, Mr. Moriarty said.

A source at the NAIC said one firm pulled its bid, feeling theproject was too large for it to complete.

Regulators have used rating agency evaluations on securities todetermine insurer risk-based capital requirements. But Mr. Moriartysaid insurers have raised concerns over the sudden massivedowngrades on RMBS by rating agencies. Life insurers in particular,Mr. Moriarty said, have $3.1 trillion in invested assets–15 percentof which is in RMBS. The downgrades mean RBC requirements for lifeinsurers could increase by $9 billion.

Insurers have argued that rating agencies only take into accountthe probability of a default and not the severity of the default,Mr. Moriarty said. Furthermore, insurers are contending thatratings are too volatile, as demonstrated by the sharp downgrade ofAAA-rated securities during the credit crisis.

Mr. Moriarty said the American Council of Life Insurers hadproposed to the NAIC Valuation of Securities Task Force–which ischaired by New York–that the NAIC independently look at RMBS andgive its own designation. Mr. Moriarty said the task force agreed,"but logistically we could not do it due to the lack ofresources."

Now the task force will vote on Oct. 14 to decide if the NAICwill issue a request for proposal (RFP) to contract this serviceout to a vendor. Mr. Moriarty said, "My sense is that the NAIC willsupport it." He added, "N.Y. supports this proposal."

He stressed that the proposal is not meant to demonize therating agencies. He said they do a credible job rating corporatebonds, "but with RMBS, they got it wrong."

The proposal, Mr. Moriary said, meshes with testimony givenduring an NAIC Rating Agency Working Group hearing last month inNational Harbor, Md., that stated that the NAIC should not relysolely on information provided by rating agencies. The ratingagencies themselves made that point, Mr. Moriarty noted.

Asked how regulators can be sure vendors will fare any betterthan the rating agencies in evaluating RMBS risks, Mr. Moriartysaid, "When we get the RFP, we'll look at the models and theassumptions they make."

He noted that the vendors are all well-respected firms used byWall Street and by insurers. "Certainly we have no assurance thatanyone can get it perfect," Mr. Moriarty observed.