NAIC Plenary Approves New Model For Assessing RMBS

NU Online News Service, Nov. 9, 3:45 p.m. EST

The National Association of Insurance Commissioners has approved a proposal to develop a new model for rating residential mortgage-backed securities (RMBS) held by insurers.

This new model is the latest action by the NAIC to distance regulators from exclusive reliance on nationally recognized rating agency evaluations of securities for the purpose of determining insurer risk-based capital (RBC) levels.

The plan involves the NAIC setting up six designations for RMBS and establishing ranges of prices for each designation. Additionally, the NAIC is to contract with an independent third party to assist with the modeling efforts.

Matti Peltonen, bureau chief, capital markets, at the New York State Insurance Department said he expects the third party firm to be chosen by the end of this week. He said the NAIC received "about two or three dozen responses" to its request for proposals, but that the NAIC will likely not make the names of the bidders public.

The American Council of Life Insurers called for the change in September, arguing to the NAIC that current ratings by Nationally Recognized Statistical Rating Organizations (NRSROs) failed to distinguish between securities with a total loss and those projected for minor losses.

The result, ACLI contended, has been regulators' capital reserve requirements for insurers skyrocketing as ratings on RMBS plummeted, particularly for life insurers.

Regulators agreed to have the NAIC Securities Valuation Office go ahead with the hiring of a third-party firm during a joint conference call on Oct. 14 involving the Valuation of Securities Task Force and the Financial Condition Committee. This latest approval brought the Oct. 14 proposal before the Executive and Plenary committees.

"Compared to the rest of financial services, the insurance industry has weathered the impact of the credit crisis extremely well," said Roger Sevigny, NAIC president and New Hampshire Insurance Commissioner.

"However, if these last two years have taught us anything, it is that we can never have too many tools with which to measure and improve our view of our industry and the effect of these complex securities," he noted.

Mr. Sevigny added, "The NRSROs have had an important role in the financial markets, but the situation with residential mortgage-backed securities exposed their blind spot. By reducing regulatory reliance on the rating agencies for these securities, at this time, we can better assure consumers that their insurance companies will remain strong and fulfill their financial obligations."