Rating Agency (E) Working Group
Rating Agency (E) Working Group Page
Joint Executive (EX) / Plenary Committee Summary Report
Fall 2009 Meeting Summaries Index

The Rating Agency (E) Working Group met Sept. 24, 2009, for a public hearing on the role of rating agencies in state insurance regulation. During this hearing, the Working Group:

• Discussed the role of rating agencies in state insurance regulation by having three distinct panels to address different issues. The panels consisted of representatives from rating agencies (Moody’s, Standard & Poor’s, Fitch, DBRS and Realpoint), an insurance consumers representative, investment experts, state insurance regulators, the U.S. Securities and Exchange Commission, critics of the rating agencies, and representatives of the insurance industry.

• Panel 1: Use of Ratings in State Insurance Regulation
  The discussion during this panel was focused on the states’ use of ratings in insurance regulation. The discussion included specifics on how the ratings are included in risk-based capital formulas and the sources of this information from insurers’ filings. Also included was information on the NAIC’s adoption of the filing exempt rule in the early 2000s, and the need for such an allowance, given the limited resources at the NAIC Securities Valuation Office (SVO). One panelist discussed the need for a balanced approach, while another panelist suggested the need for insurance regulators to shift away from any reliance on rating agencies to a system where the ratings function is performed by the SVO.

• Panel 2: Rating Agencies – What Happened?
  The discussion during this panel was focused on rating agency problems associated with structured securities. This included discussion as to why the agencies were slow in responding to the problems in the mortgage markets, despite well-publicized indications that the housing sector nationwide was in distress. Also included was discussion on the various inherent conflicts of interest that exist in the ratings system – particularly the potentially perceived incentives created by having securities issuers pay for ratings. Concern was expressed by regulators that, despite some of the changes being made by the agencies to address these conflicts of interest, some of the conflicts might not be able to be overcome, as they were largely embedded in the corporate culture of such organizations. Regulators also expressed concern regarding the potential for the rating agencies’ accuracy to deteriorate further if regulators do as the agencies suggest and place less reliance on ratings, thereby decreasing the value of the agencies’ products, the profits of the agencies and, ultimately, the resources devoted to such products. The panel also discussed the idea of making public all of the information provided by insurers to rating agencies on structured securities. Also noteworthy in the discussion was the need for rating agencies to obtain monthly mortgage-servicing data, and other available data on borrowers, in order to constantly monitor the performance of the underlying mortgage-backed securities.

• Panel 3: Recommendations and Alternatives to How the NAIC Uses Ratings
  The discussions during this panel were varied in nature but, in general, were focused on ways to lessen the regulators’ reliance on ratings. The Working Group heard from the SEC about how and why the SEC has recognized rating agencies in its rules and regulations. There was a discussion on the need for increased competition, and how the removal of the Nationally Recognized Statistical Rating Organization (NRSRO) designation — along with an increase in the use of a model where securities buyers pay for ratings — could increase competition and thereby improve rating quality. However, the Working Group noted that it did not believe such changes would address their decision as to how to reduce the regulators’ reliance on ratings. The Working Group also discussed the various types of investment risk, and which of those risks are addressed by the agencies, and the quality of such products by the agencies. There was discussion regarding a proposal from the American Council of Life Insurers to bypass the credit rating agencies by relying on an independent third party to analyze credit and investment risk, as well as other potential suggestions, but no decisions were made as to any alternatives to the current system.

• Announced that it was accepting written materials, including comments on any of the materials or topics discussed during the hearing, until Oct. 7.