NAIC TO PRODUCE NEW RATING MODEL
Regulators to Hire
Independent Third Party Partner,
Reduce Reliance on Traditional
Credit Rating Agencies
WASHINGTON, D.C. (Nov. 6, 2009) — Members of the
National Association of Insurance Commissioners (NAIC) approved a
proposal this week to develop a new model for determining the
regulatory treatment of residential mortgage-backed securities
(RMBS). The new model will produce ratings designations for
approximately 18,000 RMBS owned by U.S. insurers at the end of 2009.
“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.”
This NAIC action reflects a
loss of confidence in the ratings for residential mortgage-backed
securities produced by nationally recognized statistical ratings
organizations (NRSRO). Until now, these ratings have been used by
regulators to score these securities for solvency regulation.
Problems with mortgage-backed securities began to appear during the
third quarter of 2005, yet NRSRO ratings failed to represent these
problems until late 2007.
Regulators have expressed concerns
that current ratings do not treat RMBS losses appropriately for the
purposes of determining risk-based capital and about the inherent
conflicts of interest that exist within the current “issuer pays”
rating agency model.
“The NRSROs have had an important role
in the financial markets, but the situation with residential
mortgage-backed securities exposed their blind spot,” Sevigny said.
“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
The NAIC formed the Rating Agency Working Group
earlier this year to examine the use of ratings by state insurance
regulators and determine the risk that such ratings inject into the
regulatory process. The NAIC plans to partner with an independent
third party to develop an appropriate model for analyzing these
securities. The NAIC issued a request for proposal (RFP) on Friday,
Oct. 23, 2009. RFP responses were due Wednesday, Nov. 4. The NAIC
will announce the firm selected in mid-November.
of the assignment will be the production of a set of NAIC
designations used by insurers to calculate the risk-based capital
(RBC) charges for each specific RMBS that they own. These
designations will apply only to year-end 2009
to view the proposal.
to go to the Rating Agency Working Group site.
The NAIC issued Request for Proposal (RFP) 1344: Assessment of Residential Mortgage Backed Securities (RMBS) Oct. 23, 2009. The submission deadline has passed. A vendor will be announced when a contract is finalized. This is expected to occur by the end of November 2009.
About the NAIC
Formed in 1871, the National Association of Insurance
Commissioners (NAIC) is a voluntary organization of the chief
insurance regulatory officials of the 50 states, the District of
Columbia and five U.S. territories. The NAIC has three offices:
Executive Office, Washington, D.C.; Central Office, Kansas City,
Mo.; and Securities Valuation Office, New York City. The NAIC serves
the needs of consumers and the industry, with an overriding
objective of supporting state insurance regulators as they protect
consumers and maintain the financial stability of the insurance
marketplace. For more information, visit www.naic.org.
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