Editorial
Front Page - Friday, November 13, 2009
Insurance Insights
NAIC to produce new rating model for mortgage-backed securities
Jay Bradford
The National Association of Insurance Commissioners approved a proposal last week to develop a new model for determining the regulatory treatment of residential mortgage-backed securities. The model will produce ratings designations for approximately 18,000 RMBS owned by U.S. insurers at the end of 2009.
According to my colleague, Roger Sevigny of New Hampshire who currently serves as the NAIC President, the insurance industry has weathered the impact of the credit crisis extremely well compared to the rest of financial services. He noted, however, that if the 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. 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.
Since I became Arkansas Insurance Commissioner in January of this year, and thus became a member of the NAIC, I have observed state regulators expressing concern 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 with the current “insurer pays” rating agency model.
According to Sevigny, the NRSROs have had an important role in the financial markers, but the situations with residential mortgage-backed securities exposed their blind spot. He and the NAIC feel that by reducing regulatory reliance on the rating agencies for these securities, at this time, consumers can be better assured that their insurance companies will remain strong and fulfill their financial obligations. It is this maintenance of solvency that regulators deal with on a daily basis.
In response to the perceived problems of these rating systems, the NAIC formed the Rating Agency Working Group earlier this year to examine the use of ratings by state insurance regulators and to 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. It issued a request for proposal on Friday, October 23, 2009. The responses were due last week. 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 charges for each specific RMBS that they own. These designations will apply only to year-end 2009 reporting.
The Arkansas Insurance Department is located at 1200 West Third Street in downtown Little Rock. 1-800-852-5494. www.insurance.arkansas.gov
Jay Bradford was appointed Arkansas Insurance Commissioner by Governor Mike Beebe on January 15, 2009.
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