Insurers, Regulators Tussle Over Getting Written Opinion On Securities

A makeover of the securities rating arm of the National Association of Insurance Commissioners is focusing on the value of written opinions on securities ratings.

Both regulators and insurers have been working to streamline the Securities Valuation Office, based in New York.

Securities are rated on a 1 to 6 basis, with 1 being the highest. Regulators recently decided to exempt from filing requirements highly rated securities that would receive a rating agency equivalent of a 1 or 2 rating. That part of the project will be advanced when a way is finalized to make it revenue neutral.

Additionally, efforts are under way to expand that project and exempt the remaining securities in the 3-6 categories.

However, differences exist over whether SVO analysts who rate a security purchased by an insurer should provide a written decision explaining why the security received the assigned rating.

Insurers say that a written explanation is standard business procedure that would provide transparency and make the process more efficient.

The SVO maintains that there is written documentation that regulators can access to help them make regulatory decisions.

A written explanation that is part of a formalized appeals process would minimize the likelihood of getting different answers from different SVO staff, according to Bill Schreiner, a life actuary with the American Council of Life Insurers, Washington. It will also be instructive for insurers, he continued, because they will learn if they are assessing securities in the same way as the SVO and can purchase future securities based on that knowledge.

Written documentation is just part of the normal process of making filings such as annual statement or product filings, according to Martin Carus, representing American International Group, New York. Such a procedure will improve transparency, or the availability of information, he added.

However, Blaine Shepherd, a Minnesota regulator, maintained the draft proposal currently being considered to streamline the SVO affords insurers with proper disclosure and appeals opportunities.

“Dont you want consistency and transparency so that people can make decisions?” Carus asked regulators. A verbal explanation from SVO staff is “no way for business to be conducted,” he continued.

But Robert Carcano, senior securities valuation counsel with the SVO, countered, saying that the SVO does have an appeals process. This process includes putting decisions in writing that can be accessed by regulators.

It is not the purpose of the SVO to provide investment guidance to insurers, Carcano added.

If that is the case, written records should be made public, Schreiner responded.

In addition, according to Carus, companies need to know the rationale for securities ratings because it affects the amount of capital that companies need to set aside to reserve for these securities and that capital costs companies money.

If SVO staff is willing to provide verbal explanations but not write them down, “that decision is absolutely worthless,” Carus added. “If [a security] is a 3 when [a company] thought it was a 2, that is extra capital that costs money, which is reflected in the prices to people who buy our product,” Carus maintained.

If companies had information, it would also help reduce the number of appeals filed with SVO, Carus said. Companies dont want to file appeals because they are “costly and time consuming,” he added.

Several regulators noted that exempting 1 and 2 rated securities is a big step in the streamlining process and said they want to discuss the issue with their insurance commissioners before taking a vote.

But regulators did advance a proposal on the appeals process that would expand the appeals time from 90 days to 120 days. The proposal will receive more discussion during the fall meeting of the NAIC, which starts on Sept. 13.


Reproduced from National Underwriter Life & Health/Financial Services Edition, September 8, 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.