NAIC Looks To End Exclusive Reliance On Rating Agencies

NU Online News Service, Oct. 8, 4:01 p.m. EDT

The National Association of Insurance Commissioners is preparing to vote on a proposal that would end regulators' exclusive reliance on rating agencies for determining risks associated with insurers' residential mortgage backed securities investments.

The proposal, said Michael Moriarty, deputy superintendent of the New York State Insurance Department, would have the NAIC contract with vendors to evaluate the risks. Several analytical firms, including BlackRock, Inc., PIMCO, and others, have met with the NAIC and indicated they could complete the necessary work before the NAIC's Dec. 31 deadline, Mr. Moriarty said.

A source at the NAIC said one firm pulled its bid, feeling the project was too large for it to complete.

Regulators have used rating agency evaluations on securities to determine insurer risk-based capital requirements. But Mr. Moriarty said insurers have raised concerns over the sudden massive downgrades on RMBS by rating agencies. Life insurers in particular, Mr. Moriarty said, have $3.1 trillion in invested assets–15 percent of which is in RMBS. The downgrades mean RBC requirements for life insurers could increase by $9 billion.

Insurers have argued that rating agencies only take into account the probability of a default and not the severity of the default, Mr. Moriarty said. Furthermore, insurers are contending that ratings are too volatile, as demonstrated by the sharp downgrade of AAA-rated securities during the credit crisis.

Mr. Moriarty said the American Council of Life Insurers had proposed to the NAIC Valuation of Securities Task Force–which is chaired by New York–that the NAIC independently look at RMBS and give its own designation. Mr. Moriarty said the task force agreed, "but logistically we could not do it due to the lack of resources."

Now the task force will vote on Oct. 14 to decide if the NAIC will issue a request for proposal (RFP) to contract this service out to a vendor. Mr. Moriarty said, "My sense is that the NAIC will support it." He added, "N.Y. supports this proposal."

He stressed that the proposal is not meant to demonize the rating agencies. He said they do a credible job rating corporate bonds, "but with RMBS, they got it wrong."

The proposal, Mr. Moriary said, meshes with testimony given during an NAIC Rating Agency Working Group hearing last month in National Harbor, Md., that stated that the NAIC should not rely solely on information provided by rating agencies. The rating agencies themselves made that point, Mr. Moriarty noted.

Asked how regulators can be sure vendors will fare any better than the rating agencies in evaluating RMBS risks, Mr. Moriarty said, "When we get the RFP, we'll look at the models and the assumptions they make."

He noted that the vendors are all well-respected firms used by Wall Street and by insurers. "Certainly we have no assurance that anyone can get it perfect," Mr. Moriarty observed.