Insurance industry and Wall Street representatives expressed more concerns as regulators revealed their latest proposals for rating the financial strength of insurers' hybrid securities investments.
During a recent teleconferenced session of the National Association of Insurance Commissioners, new hybrid RBC working group, regulators put forward three scenarios for public comment.
Insurers and representatives of those issuing and selling hybrids peppered regulators with questions.
The one question that was raised repeatedly was what extra risk in these securities regulators saw that was prompting them to change RBC requirements.
Other points they asked about are: what is the exact definition of a hybrid that regulators are using and what risk is being addressed.
The goal, according to Lou Felice, a New York regulator and chair of the working group, is to reach a short-term solution for 2006 and a long-term solution for 2007 and beyond.
As part of the short-term solution, the risk based capital treatment for various hybrid investment scenarios would be as follows:
Scenario one- life bonds and preferred securities would receive RBC factors of between 0.4 percent and 20 percent based on NAIC category designations while property-casualty and health bonds and preferred securities would receive RBC factors of 0.3 percent to 30 percent based on NAIC category designations.
Scenario two- no hybrid securities would be reported as bonds and preferred securities would receive the same treatment as scenario one. More preferred securities would use higher RBC factors due to the notching requirement. Securities could be lowered by up to two notches based on NAIC designation classes.
Scenario three- the same as scenario one except that for life unaffiliated capital securities: there would be 30 percent default adjusted by an insurer's beta volatility measure to a minimum of 15 percent and property-casualty and health unaffiliated common stock would be a15 percent default factor. All affiliated capital stock would be a percent of RBC or other calculation by type or affiliate.
The scenarios will receive a 15-day comment period before the issue is taken up at the NAIC fall national meeting in St. Louis.
While regulators seek a short-term resolution to the dispute with industry, Mr. Felice said that a long term effort to analyze risks and associated charges for hybrids is even more important.
Among the risks that regulators cited during the discussion are: extension risk in which the security might not mature at the time it was expected to mature, and the security would be more volatile than was incorporated in any of its available ratings.
Doug Stolte, a Virginia regulator, suggested that one possible solution would be to use a blended RBC calculation like rating agencies use for credit ratings with a range from 100 percent debt to 100 percent common stock.
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