Panel Picks RMBS Assumptions

The Valuation of Securities Task Force has worked with an outside firm to develop a set of 5 principles for use in assessing the risk-adjusted value of residential mortgage-backed securities.

The task force, an arm of the National Association of Insurance Commissioners, Kansas City, Mo., has come up with the proposed economic assumptions with help from staffers in the NAIC’s own Securities Valuation Office and consultants at Pacific Investment Management Company L.L.C., Newport Beach, Calif., officials say.

The NAIC hired the PIMCO Advisory arm of PIMCO to help it come up with a new approach to including RMBS in insurers risk-based capital calculations.

In the past, insurers have used ratings from the major rating agencies to adjust values to reflect the risk that an issuer might default.

This year, life insurers have argued that the traditional approach would work poorly, because it would wipe out the entire risk-adjusted value of an RMBS if there had been any kind of default, even if it seemed likely that the issuer would end up paying some, or even most, of what it owed.

PIMCO Advisory plans to work with SVO staffers to develop statistical forecasting “models” that can predict how well the RMBS in life insurers’ portfolios might do for RBC purposes, officials say.

In a discussion draft posted in the securities valuation task force section of the NAIC website, the task force is recommending that:

- The median home price appreciation scenario used in the valuation models would be the PIMCO Advisory standard base case scenario.