The National Association of Insurance Commissioners plans to move in a deliberate manner in overhauling its securities evaluation process, its president told a House panel today, and in the meanwhile rely on interim guidance to stabilize the pricing by markets of such complex securities as hybrid issues.
At the same time, NAIC president and Maine Insurance Commissioner Alessandro Iuppa testified before the Capital Markets Subcommittee of the House Financial Services Committee that the group is committed to making its securities evaluation process more transparent. It will just take time, he said.
The hearing was prompted by a drop in market value of certain hybrid securities owned by insurance companies after the Securities Valuation Office, a securities rating arm of the NAIC, changed its valuation of them March 15. The effect on the estimated $15 billion market for hybrid securities was initially strong, but, of greater anxiety to the market was that the concern spread to include securities valued at $100 billion, Kevin Conery, a representative of the Bond Market Association, said.
Iuppa stood his ground at the hearing despite intense criticism of the current SVO process by Michael Hunter, executive vice president and chief operating officer of the American Council of Life Insurers; the BMA’s Conery; and Rep. Richard Baker, R-La., chairman of the Capital Markets Subcommittee of the House Financial Services Committee.
“We want a dialogue, not a monologue,” said Conery, who is also senior director and preferred securities strategist at Merrill Lynch, on behalf of the BMA at the hearing.
Iuppa’s timetable to the Committee for revision of the process calls for a special task force led by the New York Department of Insurance to present a report to commissioners dealing with the ongoing evaluation and disclosure of the value of hybrid securities by the close of the NAIC’s next quarterly meeting Dec. 12.
The NAIC will then evaluate the report through its normal Executive Committee and plenary process, he told National Underwriter after the hearing, but a final decision on a revised process for greater transparency may not occur until the NAIC’s March 2007 regular quarterly meeting.
In the interim, Iuppa and NAIC officials in Kansas City said a process put into final form last week by the NAIC and likely to be adopted soon by the commissioners will remain in place.
The short-term proposal, for 2006 and until 2008, or until a long-term solution is decided upon, includes a definition of hybrid securities, new guidance for hybrid security financial reporting and RBC treatment, and initial draft language for a proposed Notes to Financial Statement disclosure of hybrid securities owned by the insurer, the NAIC staff said.
But resolution of the transparency issue for the SVO, the target of intense criticism at the hearing, “is not part of the short-term solution,” an NAIC official in Kansas City confirmed.
The aggregate decrease in market value in the hybrid securities market was approximately $1 billion, Hunter estimated, under questioning by Baker. But the interim solution appears to be working, Hunter testified. “We anticipate a favorable response to this solution by the capital markets and expect to experience a recovery of some of the market value and liquidity in the market for hybrids,” he said.
But the experience, Baker said, led him to call the NAIC and the SVO an “elephant’s foot” because of its potential effect on U.S. competitiveness in the global market. “[The foot] has a major impact when it hits the ground,” Baker said.
He asked Iuppa to send his subcommittee a copy of the report when it is completed in December as part of the ongoing panel oversight of insurance issues.
Among the problems with the current process, Hunter, Conery and Baker said at the hearing, is that the current system allows some parts of the market to learn of SVO decisions before other parts do.
Iuppa responded by saying that one of the interim solutions is to allow some parts of the market limited-but-free access to the SVO website.
But he defended the NAIC and SVO decision not to accept rating decisions of the national credit rating agencies because they don’t always account in their ratings for all of the investment risks considered by the SVO.
“Without the consumer protection afforded by strong financial regulation, an insurance policy may not be worth the paper it is written on,” Iuppa said. “State insurance officials serve the public by means of independent and honest financial oversight to safeguard insurers’ capacity to pay claims.”
He also defended the SVO’s original decision, noting that not all of the controversial 8 rating decisions made by the SVO that created the market instability have been changed.
“We stand by our recent analysis, both in the substance and the process,” he said. “Although some asserted that our reclassification of a relatively small number of securities would have dire consequences, we have uncovered no insurer that would become financially impaired or unable to meet the minimum capital and surplus level required by our risk-based capital formula as a result of these decisions.”
But Iuppa was conciliatory in his responses to Hunter, Conery and Baker, saying that state officials are taking their concerns seriously.
“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.”