Representatives for insurers and Wall Street investment firms are criticizing actuaries’ efforts to update the rules for classifying the riskiness of hybrid securities.
The critics raised the complaints during a recent conference call organized by the hybrid risk-based capital working group, an arm of the National Association of Insurance Commissioners, Kansas City, Mo.
The critics said the actuaries developed a hybrid securities risk-classification work plan without input from industry.
The working group is trying to replace a set of temporary rules for classifying hybrids for RBC calculation purposes with a long-term solution.
The NAIC’s Securities Valuation Office put the controversy over hybrid securities risk classification in the spotlight earlier this year, when the SVO notified some companies that it would review the treatment of hybrid securities that the companies held in their portfolios.
The working group had asked the American Academy of Actuaries, Washington, to develop a work plan that could be discussed during the NAIC call.
Efforts to develop the work plan did not include industry because AAA calls are open only to AAA members, regulators said during the working group conference call.
Industry representatives said time and effort could have been saved if insurers had been involved from the start.
“What would have been so terrible?” said Martin Carus, a representative for American International Group Inc., New York. “We wouldn’t have been disruptive. We wouldn’t have had a sit-in.”.
But the AAA specifically says it represents actuaries, not companies, according to Doug Barnert of Barnert Global Ltd., New York.
“Issues are different for a CIO or a risk manager than for an actuary,” Barnert said. “Actuaries are one element of the profession. They do not represent the industry.”
Representatives for the AAA were not immediately available to comment on the discussion.
Lou Felice, chair of the hybrid RBC working group, and AAA representatives David Berger and Nancy Bennett said during the working group conference call that the purpose of the hybrid discussions is to get input from all interested parties, so that the final product will reflect everyone’s opinion.
Participants in the working group session did start to work their way through the AAA draft.
The work plan includes a definition of hybrids, identification of risks associated with these instruments, and a section reviewing different methodologies for determining RBC charges.
The draft defines hybrid securities for the purpose of the project as “those securities whose proceeds are accorded some degree of equity treatment to the issuer by one of more of the nationally recognized statistical rating organizations and/or which are recognized as regulatory capital by the issuer’s primary regulatory authority.”
The draft notes that hybrids tend to be subordinated to other securities.
The current definition includes surplus notes but also states that it will be examined only from the perspective of the investor, or when an insurer has invested funds in a surplus note issued by another insurer. It will not be examined as part of RBC treatment for the issuer of surplus notes.
Risks enumerated in the work plan draft include: extension risk, complexity/lack of historical data, regulatory/tax/accounting, rating and price volatility, credit, liquidity, and deferral.
Points raised by industry representatives during the course of the discussion included:
- Whether the issue was targeting hybrid securities or whether it was really risk characteristics that appeared in all securities that was at issue.
- How operationally both the SVO and insurers are going to implement points discussed in the plan.
- How specifically, issues such as tax and accounting issues will be addressed.
- The potential complexities of analyzing volatility and liquidity risks.