A leading regulator is urging the National Association of Insurance Commissioners to make the process of rating hybrid securities more transparent and to defer enforcing classification of these securities until commissioners decide how they should be treated.

And, the insurance industry continues to discuss the issue. In fact, last week during a board meeting of the American Council of Life Insurers, Washington, treatment of hybrid securities was discussed, according to Jack Dolan, an ACLI spokesperson. “We’re looking forward to working out the hybrid securities issue with the NAIC,” Dolan says.

Both life and property-casualty insurers have been urging regulators to revisit the issue since the spring NAIC meeting in March.

Insurers and the Securities Valuation Office, the NAIC’s securities rating arm, based in New York, have been locked in a disagreement over how hybrid securities in insurers’ portfolios should be treated. Insurers say they should be treated as debt, but the SVO says that in some cases they should be treated as equity. The classification determines the risk-based capital treatment that the security is assigned, with equity having a higher RBC charge than debt.

During the recent NAIC summer meeting, regulators first agreed to suspend classification decisions until the matter could be more thoroughly reviewed during a scheduled interim meeting. Two days later, the decision was reversed, with regulators deciding to hold insurers to classification decisions while trying to reach a resolution on the issue.

In a letter dated June 21, New York Superintendent Howard Mills noted that “although there have been some varying estimates as to the economic impact, it is our view that even a one percent negative impact on total industry holdings in excess of $40 billion is significant when the basis for the classifications are, for all intents and purposes, not subject to disclosure.”

Mills wrote that “in order to defend a position, one must disclose the basis for the decision.” But, he continued, his remarks were not meant to criticize the SVO, which he indicated was operating under the confidentiality guidelines established by the SVO Purposes and Procedures Manual.