NU Online News Service, Dec.7, 2:30 p.m. EST

SAN FRANCISCO–A National Association of Insurance Commissioners working group has drafted recommendations as to how the organization should deal with its reliance on national rating agencies to evaluate insurers' investments.

Although the NAIC Valuation of Securities Task Force has moved forward with its own rating agency initiatives regarding residential mortgage backed securities, the Rating Agency Working Group has continued a broader examination into NAIC reliance on nationally recognized rating agencies after holding a September hearing at its Fall National meeting.

Last month the NAIC, after examining bid proposals that it has refused to make public, gave the PIMCO investment management firm the job of reevaluating residential mortgage backed securities that insurers complained were undervalued by the major nationally recognized securities rating firms.

Now, at the Winter National Meeting here, the working group voted to release for comment a draft containing recommendations for the NAIC's continuing process of evaluating securities ratings.

Besides recommendations for actions the NAIC can take, the draft makes suggestions to the rating agencies themselves on some reforms they should consider, including developing standards for analyst training, creating an office of chief statistician and models who would report to an independent committee of the ARO's [Acceptable Rating Organizations] board of directors and requiring the development of standards, greater standardization of definitions, and greater consistency in the agreements used for structured securities.

For the NAIC, the draft states, among other recommendations, that regulators should continue to develop independent analytical processes to assess investment risks.

"These mechanisms can be tailored to address unique regulatory concerns and should be developed for use either as supplements or alternatives to ratings, depending on the specific regulatory process under consideration," the draft states.

It also recommends that the NAIC should have an ongoing process to monitor and evaluate acceptable rating organization (ARO) activities, examine "the extent to which insurers rely on ratings instead of performing their own due diligence, and examine both state insurance laws and NAIC model investment laws for references to AROs and consider modifications to those laws."

The draft will be available for comment until Jan. 6, and is available at http://www.naic.org/committees_e_rating_agency.htm.

After comments are received, the NAIC will hold a public hearing via conference call, said Illinois Insurance Director Michael McRaith, Co-Chair of the working group.

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