SAN ANTONIO, TEXAS–A short-term solution for assessing the risk and financial strength of insurers' hybrid securities investments has been adopted by the nation's insurance regulators.
The National Association of Insurance Commissioners' action came even as the organization's Hybrid Risk-based Capital working group adopted a work plan for a more comprehensive long-term plan for rating hybrids.
Adoption of the short-term solution came by unanimous vote here at the Kansas City, Mo.-based NAIC's winter meeting here.
The Hybrid RBC work group adopted a work plan with a minor change and plans to continue fine-tuning that plan. The work plan was developed by the American Academy of Actuaries, Washington. The Academy will be studying risk as it relates to hybrid securities.
Earlier this year, a short-term solution was reached so that accounting for risk in these securities would be incorporated into risk-based capital calculations this year. But, regulators were charged with developing a long-term plan that looks at risk.
The Academy plan defines hybrid securities as "those securities whose proceeds are accorded some degree of equity treatment to the issuer by one or more of the nationally recognized statistical rating organizations and/or which are recognized as regulatory capital by the issuer's primary regulatory authority."
The document includes examples of risk that range from extension risk to rate volatility and price volatility. The Academy document also notes that while the classification between debt and equity is a focus of the rating agencies and the annual statement, the document focuses on the underlying characteristics giving rise to those risks.
The one change that was made to the document was the removal of a sentence that noted that receiving input from parties other than the Academy is the responsibility of the NAIC's hybrid task force.
Nancy Bennett, a life actuary representing the Academy, explained how the Academy would continue to look at the issue. The Academy will look at the risk to the investor and not the risk from the issuer's perspective, she said.
An analysis of hybrid risks will look at what the risks are and compare them with how they look in other assets, Ms. Bennett added.
For instance, she said, a comparison could look at points such as how extension risks in hybrid securities compare with the risks in collateralized mortgage obligations. Ms. Bennett continued that the Academy was starting with a blank slate approach to risks and had no particular position on what risk-based capital should be for these securities.
Chris Anderson, representing Merrill Lynch, said that if the purpose of the plan was to assess risk "efficiently," then it would probably work. However, he said the purpose section of the plan could be more focused on a change that could streamline the project and reduce participants' workload.
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