NU Online News Service, Sept. 10, 3:50 p.m. EDT
State insurance commissioners plan to grill the top credit rating agencies as to why the commissioners shouldn't seek other guidance in evaluating insurers' securities holdings, a key regulator said.
"The commissioners are going in with an open mind, but there's been a lot of criticism out there," said Hampton Finer, deputy superintendent and chief economist with the New York Insurance Department.
Mr. Finer spoke in advance of a hearing set for Sept. 24 by a unit of the National Association of Insurance Commissioners, to which the Nationally Recognized Statistical Rating Organizations (NRSROs) have all been invited.
NAIC evaluates the holdings of insurers, and based on how the NRSROs rate the carriers' securities, the NAIC sets a minimum required amount of capital reserves that the insurer most hold against possible equity losses, Mr. Finer said.
Mr. Finer said there was a "view that there's been an overreliance on rating agencies," mentioning recommendations by the U.S. Treasury and the Group of 20 Finance Ministers and Central Bank Governors.
He said the NAIC Rating Agency Working Group, which has invited insurance companies, pension funds and others to testify on the NAIC reliance on NRSRO ratings, will among other things ask about ratings of "structured securities where there's been a problem."
As an example, he mentioned residential- mortgage backed securities that plunged in value after receiving satisfactory ratings from the NRSROs.
Mr. Finer said the Working Group has sent the NRSROs questionnaires and have received "voluminous responses that were quite helpful," but he said the NAIC wants clarification of some questions that were not answered completely.
NAIC, he said, does not believe the NRSROs have a monopoly on good rating models for securities, and the organization may perhaps use "another vendor to do some calculations and use those to develop and appropriate capital charge" for insurers.
The organization wants to "see if anybody else has a better mousetrap that can provide better warnings and more transparency," noting that there "are a lot of folks that have very advanced models that are quite state of the art.
He mentioned Black Rock, Risk Metrics and Andrew Davidson among other firms.
Rating firms that were contacted had no immediate comment.
In its announcement of the hearing, which will be held at Gaylord Convention Center in National Harbor Md., the NAIC noted that insurance companies hold nearly $3 trillion in rated bonds, and the insurance industry constitutes the largest sector of the financial services industry to rely on credit ratings to supervise capital asset adequacy.
Insurance regulators, it noted, currently mandate the use of credit ratings to determine capital reserves and other regulatory requirements for insurance companies.
The Working Group is co-chaired by Acting New York Insurance Superintendent James J. Wrynn and Illinois Insurance Director Michael T. McRaith.
According to the announcement, the hearing will examine the historical reliance of insurance regulators on ratings and the impact of this reliance.
Issues concerning ratings, particularly related to structured securities and municipal bonds, recent systemic remedies or procedural changes enacted by NRSROs, recommendations and alternatives to NRSROs for prudential regulation, will also be looked at.
Following the hearing, the Working Group said it will develop and present a final report documenting the findings and any recommendations for corrective action available to the NAIC and its members, as well as recommendations to the federal government on NRSRO regulation.
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