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SVO Streamlining Moves Forward

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NU Online News Service, June 10, 2003, 6:43 p.m. EDT – An arm of the National Association of Insurance Commissioners, Kansas City, Mo., is moving closer to adopting a measure that could lead to a revamping of the NAIC’s Securities Valuation Office.

Regulators at the NAIC working group that oversees the New York-based securities rating office have given tentative approval to a motion that could exempt insurers from having to send the office information about simple securities with ratings of 1 or 2.

But the regulators say they will give final approval only if they determine that the exemption for highly rated securities would be “revenue neutral” for the NAIC.

The SVO is responsible for valuing insurers’ securities holdings.

Before the SVO values securities filings, it gives them ratings of 1 to 6. The securities that appear to be the safest get ratings of 1 or 2.

Revenue from SVO filing fees increased to $7 million in 2002, from $6 million in 2001. The NAIC budget called for the SVO to generate $5.7 million in revenue each year, according to NAIC Chief Financial Officer Brady Kelley. The NAIC has budgeted $6.1 million in SVO revenue for 2003, Kelley said.

Calculating how much revenue comes from filings of high-rated securities and how much from filings of lower-rated securities is challenging, Kelley said.

“It is very difficult to respond specifically in terms of revenue generated from 1- and 2-rated securities vs. 3-6-rated securities, primarily because the composition of these security filings can fluctuate significantly from year to year,” Kelley said. “Fluctuations are driven by market conditions, various factors affecting the capital markets, and the investment strategies of the industry.”

An NAIC evaluation based on 2001 and 2002 filing volumes suggests that a significant portion of revenue is derived from NAIC 1- and 2-rated securities. “Of the 45.8% population of rated securities filed with the SVO, approximately 43% is comprised of those securities designated NAIC 1 or 2, while the remainder relates to rated securities designated NAIC 3 through 6,” Kelley said.

Regulators hope to start streamlining the SVO filing process around Jan. 1, 2004, and they hope to ensure revenue neutrality by the time the streamlining begins.

Plans are in place to ensure that both parts of the project are “considered and resolved by the NAIC membership in unison,” Kelley said.

The full NAIC must approve both the rating exemptions and revenue neutrality provisions before the NAIC can start streamlining the SVO.

New York Insurance Superintendent Greg Serio has promoted the streamlining effort. The effort would have two stages. Phase I involves exempting securities with 1 and 2 ratings, and Phase II would eventually exempt securities with ratings of 3 to 6. Supporters of the effort hope it will reduce the amount of time SVO staff members spend reviewing simple securities that have already been reviewed by the major rating agencies and increase the amount of time the staff members spend helping state insurance regulators analyze insurer portfolios.

Regulators should be able to make the SVO “our think tank, our research arm,” Serio said during a discussion of the streamlining effort.

Regulators expressed support for the project if the NAIC can maintain revenue neutrality and the SVO’s work fits into the “mechanics of departments and examinations.”

Insurance industry groups have enthusiastically supported the streamlining effort. Among the trade groups supporting adoption are the American Council of Life Insurers, Washington; the American Insurance Association, Washington; the Alliance of American Insurers, Downers Grove, Ill.; the National Alliance of Life Companies, Rosemont, Ill.; the National Association of Independent Insurers, Des Plaines, Ill.; and, the National Association of Mutual Insurance Companies, Indianapolis.

The change will “help regulators supervise the industry in an efficient and appropriate manner,” says Bill Schreiner, an ACLI life actuary.

There will be a great savings of staff time for companies, Schreiner adds.

Bill Boyd, financial regulation manager with NAMIC, says the streamlining effort will help the industry, and he concedes that a $2 million to $3 million reallocation of SVO revenue would be small compared with the enormous size of insurance company investment holdings.

But how the NAIC resolves the funding issue is a concern for insurers, Boyd says.

Currently, Boyd says, companies with very conservative investment policies that include highly rated securities pay very little to the SVO for ratings. Under a revised system of payment, these costs could increase if companies have to contribute to make up the difference in revenue the SVO receives for rating securities.

About the issue of making the SVO the “eyes and ears” of regulators, Boyd says NAMIC would have reservations if that role entailed analyzing individual companies’ portfolios periodically or during regular financial examinations.