A key member of the House says the National Association of Insurance Commissioners should be more open about how it values securities.
Rep. Richard Baker, R-La., chairman of the Capital Markets Subcommittee of the House Financial Services Committee, made that point here today at a hearing on “Improving Transparency in State Regulation of Insurer Investments.”
Baker held the hearing to review how the Securities Valuation Office of the NAIC, Kansas City, Mo., has gone about rating hybrid securities, or securities that have characteristics both of debt and of equity.
The NAIC is like an “elephant’s foot” because of its potential effect on U.S. competitiveness in the global securities market, Baker said at the hearing. “[The foot] has a major impact when it hits the ground.”
Baker joined with Michael Hunter, chief operating officer of the American Council of Life Insurers, Washington, and Kevin Conery, a representative of the Bond Market Association, New York, in complaining about the SVO approach to explaining risk-classification decisions.
Because the SVO gives specific information about risk-classification decisions only to holders of the securities, the current system allows some parts of the market to learn of SVO decisions before other parts do, Baker, Hunter and Conery said.
“Key securities valuation information is discovered by certain parties randomly and at different times,” Conery said.
In the past, insurers and hybrid securities issuers have assumed that the SVO would see the securities as safe equivalents to ordinary bonds, but the SVO said in March that it believed some hybrid securities were more like equity securities.
Because regulators assume that stock prices are more volatile than bond values, they require life insurers to apply a substantial discount when including equity investments in risk-based capital calculations.
Securities firms have complained that confusion about hybrid risk classification has hurt their ability to issue the securities.
State officials are taking concerns about the SVO seriously, NAIC President Alessandro Iuppa, the Maine insurance superintendent, said at the hearing.
“The NAIC is continuously evolving and improving to keep up with the changing markets, and I am confident in the integrity of our open and transparent process,” Iuppa said. “Nonetheless, like any effective organization working in a dynamic market, we have initiated a review with respect to the issue of disclosure and transparency of our classification process covering hybrid securities in order to identify any improvements that should be made.”
Iuppa told the Capital Markets Subcommittee that a task force led by the New York State Department of Insurance will give commissioners a report on hybrid securities valuation and valuation disclosure by Dec. 12.