The National Association of Insurance Commissioners has picked a major bond fund manager to help state regulators assess the riskiness of residential mortgage-backed securities.
The NAIC, Kansas City, has awarded an RMBS modeling contract to Pacific Investment Management Company L.L.C., Newport Beach, Calif.
When insurers calculate risk-based capital, they are supposed to adjust the value of securities to reflect the securities’ level of riskiness.
In the past, insurers have used ratings from the major rating agencies to adjust RMBS values for RBC calculation purposes. This year, insurers pressed the NAIC to use an alternative approach.
The rating agencies flunk RMBS when issuers default in any way, wiping out the entire RBC value of RMBS even when issuers seem likely to pay some or most of what they owe, insurers have argued.
The Consumer Federation of America, Washington, argued that the NAIC should apply any change in securities adjustment strategies to all types of securities, not simply RMBS, but the NAIC ended up agreeing with the insurers.
For a year, PIMCO will help the NAIC use a homegrown RMBS model to put insurer RMBS holdings into the NAIC’s own risk designation categories, officials say.