FOR IMMEDIATE RELEASE

NAIC TO PRODUCE NEW RATING MODEL
FOR MORTGAGE-BACKED SECURITIES
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 obligations.”

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.

The result 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 reporting.

Click HERE to view the proposal.
Click HERE 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.

You are currently subscribed to the “NAIC News Release” electronic service. For information regarding this service, please contact the NAIC Communications Division, 2301 McGee Street, Kansas City, MO 64106-2197, 816-783-8909.

To unsubscribe from NAIC Electronic Services, send a blank e-mail to
NAIC Opt Out services.