One of the more interesting projects state insurance commissioners have on the front burner is a controversial plan to start up another rating agency. The question is whether this is feasible or even a good idea.
The first mention of joining the Big Four–A.M. Best, Fitch Ratings, Moody's Investors Service and Standard & Poor's–came during September's quarterly meeting of the National Association of Insurance Commissioners in National Harbor, Md.
The plan surfaced again in mid-October, when regulators discussed the possibility of starting the new enterprise with the press. In an interview with National Underwriter, New Hampshire Insurance Commissioner Roger Sevigny, president-elect of the NAIC, said the idea was floated before the financial storm that included a government bailout of American International Group.
Mr. Seivgny asserted that the plan was not an attempt to make the case for state-over-federal insurance regulation. Rather, he explained, it was just an effort to offer any insurers and debt issuers another option to those currently available.
The rating agency envisioned by commissioners would be a nonprofit entity completely independent from the NAIC. If all goes right, the idea could be put before NAIC membership as early as December's quarterly national meeting, he added.
For the eight or so commissioners spearheading the effort to have the NAIC hang out a ratings agency shingle, conversations with several rating agency analysts raised a number of questions. Among the considerations they advise commissioners to weigh are:
o The extensive staff that will be needed to efficiently and accurately create a rating organization.
o The information technology models that will have to be developed.
o The time it will take to get an operation up and running–provided that the U.S. Securities and Exchange Commission blesses the endeavor.
In the words of one ratings analyst after citing some of these hurdles: “Bring it on!”
Another analyst wondered how the dual role of regulator and rating agency would work even if there is a moat of some sort separating the two functions. For instance, this analyst considered whether there would be subtle pressure on a company being regulated to subscribe to the rating services the NAIC had developed.
Funny, but I've had several company representatives make very similar comments to me earlier this year about rating agencies and the conferences they sponsor.
One longtime company representative, who also did a stint as a rating analyst for one of the Big-Four, summed it up succinctly. If an agency that is providing you with a rating of your debt or claims-paying ability asks you to provide a speaker for their conference, pay for a booth or a table, or act as a sponsor, there is subtle pressure to comply, according to this industry official, who has seen life from both sides of the rating fence.
Once a detailed plan is developed, it will be easier to see whether the NAIC is heading down the right path. But the proposal raises some initial thoughts–the first being: “Be careful what you wish for…”
Rating agencies are taking a lot of heat for their ratings of mortgage-backed securities and collateralized debt obligations. If the NAIC is going to rate such esoteric securities, does it have the expertise or the deep pockets to recruit qualified experts–as well as the liability coverage it might need to insulate itself from investor, creditor or policyholder lawsuits in the event of heavy losses?
Speaking of deep pockets–will the money to cover startup and operating costs come from ratings fees alone, or will insurers be assessed through the NAIC to create and run the new agency? And, if there are any lawsuits, will only the NAIC-created rating agency be sued, or NAIC as well?
As the rating agencies learned along with the rest of us, the value of securities can turn on a dime. Is the NAIC nimble enough to react quickly and respond to a crisis? Or is the organization wading into quicksand?
Another age-old admonition comes to mind: Don't bite off more than you can chew. Currently, the NAIC is already working on big and potentially industry-changing projects, including:
o A principles-based reserving system that will drastically change the way reserving is done.
o Work with international regulators to create uniform regulation.
o A market conduct annual statement program that could ultimately parallel the financial reporting system the NAIC uses.
Can the NAIC handle another huge project, such as launching a ratings agency?
Even if a decision is made to merely expand the Securities Valuation Office–an NAIC arm that rates insurer securities–it is still a major jump to becoming a provider of a wide range of financial ratings.
The best case for state regulation lies in the NAIC's consumer initiatives–such as its “Insure U” educational program, as well as its Consumer Information Source, which allows consumers to search for complaints and information on insurance companies.
That's the shingle the NAIC should be hanging out.
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