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NAIC Set To Hire RMBS Modeler

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The National Association of Insurance Commissioners could choose a residential mortgage-backed securities modeling firm by the end of the week, a regulator says.

The NAIC plenary – the body that includes all voting members of the NAIC, Kansas City, Mo. – recently approved a measure that calls for the NAIC to develop a new model for rating the residential mortgage-backed securities held by insurers.

The NAIC will be trying to reduce its reliance on ratings from the “nationally recognized statistical rating organizations” for the purpose of determining insurer risk-based capital levels.

The NAIC is planning to set up 6 soundness designations for RMBS and establish ranges of prices for each designation, and it plans to contract with an independent firm to assist with the modeling efforts.

Matti Peltonen, a bureau chief with the New York State Insurance Department, says he expects the outside firm to be chosen by the end of the week. He says the NAIC received “about two or three dozen responses” to its request for proposals, but that the NAIC will likely not make the names of the bidders public.

The American Council of Life Insurers, Washington, called for the change in September, arguing that the current NRSRO RMBS ratings fail to distinguish between securities with a total loss and those projected to suffer minor losses.

The result, ACLI said, has been skyrocketing life insurance company capital reserve requirements.

The Valuation of Securities Task Force and the Financial Condition Committee agreed Oct. 14 that the NAIC should hire an outside firm. Now the NAIC’s executive committee and plenary committee have given the proposal final approval.

“Compared to the rest of financial services, the insurance industry has weathered the impact of the credit crisis extremely well,” says Roger Sevigny, NAIC president and New Hampshire Insurance Commissioner.

“However, if these last two years have taught us anything, it is that we can never have too many tools with which to measure and improve our view of our industry and the effect of these complex securities,” Sevigny says.

“The NRSROs have had an important role in the financial markets, but the situation with residential mortgage-backed securities exposed their blind spot,” Sevigny says. “By reducing regulatory reliance on the rating agencies for these securities, at this time, we can better assure consumers that their insurance companies will remain strong and fulfill their financial obligations.”
CORRECTION: Due to an editing error, the role of the firm that the NAIC is hiring was described incorrectly. The NAIC is hiring a modeling firm.


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