Regulators and insurers started working out the details for streamlining the Securities Valuation Office, the securities rating arm of the National Association of Insurance Commissioners, Kansas City, Mo.
Ensuring revenue neutrality for any exemptions for security ratings was one issue that was reviewed recently during the summer NAIC meeting in New York.
A decision by regulators to exempt class 1 and 2 securities from filing will reduce SVO revenues by approximately $2,786,200, according to the NAIC.
SVO filings are rated from 1 to 6, with the highest rated being 1 and 2.
To compensate for this reduction in income, the NAIC proposed adjusting fees for nonrated filings that will continue to be filed with the SVO, arguing that the rated fees currently subsidize nonrated fees.
Insurers, however, offered their own proposal that would apportion a pro rata share of the shortfall based on a companys share of the industrys nongovernment and preferred securities, according to Steve Broadie, assistant vice president with the National Association of Independent Insurers, Des Plaines, Ill.
The industry proposal includes other features such as a $50,000 cap for a stand-alone company or insurance group. There would be a floor that would exempt companies with under $25 million in invested assets.
During the summer meeting, it was suggested that the two approaches be blended with further discussion to follow, explained New York Insurance Superintendent Greg Serio. New York was instrumental in advancing the streamlining effort.
The SVO staff should examine the credit risk of a security and not be looking at how that security fits into a companys portfolio, said Marty Carus, a representative of American International Group, New York. Insurers have experienced investment teams that can handle investments, he said.
The discussion at the NAIC meeting followed adoption of a motion to exempt 1- and 2-rated securities by the SVO working group of the NAIC in early June.
The motion, adopted by the SVO Oversight working group, is contingent upon a determination by regulators that the exemption of these securities would be revenue neutral for the NAIC.
Revenue generated from SVO filing fees totaled $6 million and $7 million in 2001 and 2002, respectively, exceeding budgeted amounts of $5.7 million in each year, according to NAIC CFO Brady Kelley. Revenue budgeted for 2003 is $6.1 million, he says.
“It is very difficult to respond specifically in terms of revenue generated from 1- and 2-rated securities vs. 3-6 rated securities,” Kelley says, “primarily because the composition of these security filings can fluctuate significantly from year to year. Fluctuations are driven by market conditions, various factors affecting the capital markets and the investment strategies of the industry.”
According to Kelley, an NAIC evaluation of the proposal, “based on the actual filing volumes in 2001 and 2002, estimates a 43% impact on the $6.1 million revenue budget from SVO filing fees.
“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.”
Regulators want the revenue neutrality project to run parallel to the Jan. 1, 2004 timeframe, the effective date of the first phase of the streamlining project.
The New York proposal would be implemented in two stages. Phase I involves exempting 1 and 2 securities and Phase II would ultimately exempt 3-6 securities. A general goal of the project would change the deployment of SVO resources to act more as an analytic tool for state insurance regulators.
Regulators expressed support for the project if revenue neutrality is established and the SVOs work “fits into the larger mechanics of departments and examinations.”
The industry also has enthusiastically supported the effort. Among the trade groups supporting adoption of the streamlining effort 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 Assocation of Mutual Insurance Companies, Indianapolis.
The change will “help regulators supervise the industry in an efficient and appropriate manner,” says Bill Schreiner, a life actuary with the ACLI.
There will be a great savings of staff time for companies, he adds.
The project is a benefit to the industry, but how funding for the streamlining is resolved is a concern for insurers, says Bill Boyd, financial regulation manager with NAMIC. Currently, he explains, 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.
Reproduced from National Underwriter Edition, July 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.