One of the more interesting projects state insurance commissioners have on the burner is a plan to start up a rating agency.

The first mention of joining the big 4–A.M. Best, Fitch Ratings, Moody’s Investors Service and Standard & Poor’s–was during the fall meeting of the National Association of Insurance Commissioners in National Harbor, Md.

The plan surfaced again in mid-October when regulators discussed the possibility of starting the new enterprise with the press. In an interview with National Underwriter, Roger Sevigny, New Hampshire insurance commissioner and president-elect of NAIC, said the idea was floated before the financial storm that included a government bailout of American International Group blew in.

Seivgny asserted that the plan was not an attempt to make the case for state insurance regulation over federal regulation of insurers. Rather, he explained, it was just an effort to offer any insurers and debt issuers another option to those currently available.

The rating agency envisioned by commissioners would be completely independent from the NAIC, a non-profit and could, if all goes right, be put before NAIC membership as early as the December meeting, he added.

For the 8 or so commissioners spearheading the effort to have NAIC hang out a ratings agency shingle, conversations with several rating agency analysts raised a number of points worth noting.

Among the considerations they advise commissioners to weigh are the extensive staff that will be needed to efficiently and accurately create a rating, the IT models that will need to be developed, and the time it will take to get an operation up and running, provided the Securities and Exchange Commission blesses the endeavor.

In the words of one ratings analyst after citing some of these hurdles, “bring it on.”

Another analyst wondered how the dual role of regulator and rating agency would work even if there was a regulatory moat separating the two roles. For instance, this analyst considered whether there would be subtle pressure on a company being regulated to subscribe to the rating services the NAIC had developed.

Funny, I’ve had several company representatives make very similar comments to me earlier this year about rating agencies and conferences that they sponsor.

One long-time company representative who also did a stint as a rating analyst for one of the big 4 summed it up succinctly. If a rating agency that is providing you with a claims-paying rating or rating your debt comes to you and asks you to provide a speaker for their conference or host a booth or a table or act as a sponsor, there is subtle pressure to comply, according to the thinking of this industry watcher.

Once a detailed plan is developed, it will be easier to see whether the NAIC is heading down the right path.

But the proposal raises some initial thoughts, the first being, “be careful what you ask for…”

Rating agencies are taking a lot of heat for their ratings of mortgage-backed securities and collateralized debt obligations. If the NAIC is going to rate esoteric securities, does it have the expertise and the deep pockets to pay for that expertise and the liability coverage it might need to insulate itself from investor, creditor or policyholder lawsuits in the event of heavy losses? If deep pockets are needed, will the money come from ratings fees alone or will insurers be assessed through the NAIC to pay for start-up costs? And, if there are any lawsuits, would the NAIC-created rating agency be sued or the NAIC?

As the rating agencies learned along with the rest of us, the value of these securities can turn on a dime. Is the NAIC nimble enough to turn as quickly and respond to a crisis? Or is the organization wading into quicksand?

Another thought comes to mind, the age-old admonition of not taking on more than you can chew.

Currently, the NAIC is working on big and potentially industry-changing projects, including: a principles-based reserving system that will drastically change the way reserving is done; work with international regulators to create uniform regulation; and a market conduct annual statement program that could ultimately parallel the financial reporting system the NAIC uses. Can it handle another huge project?

Even if a decision is made to use the Securities Valuation Office, an NAIC arm that rates insurers’ securities, it is still a major jump to becoming a provider of a wide range of ratings.

Sevigny says the NAIC is not trying to make a case for state regulation by taking on this rating agency project. That’s a good thing. Because the greatest case for state regulation lies in its consumer initiatives such as its Insure U educational program and its Consumer Information Source, which allows consumers to search for complaints and information on insurance companies.

That’s the shingle that it should be hanging out.