Regulators should find a new way to keep insurers from using the Securities Valuation Office as a borrower stability monitor, an SVO official says.
The Valuation of Securities Task Force at the NAIC, Kansas City, Mo., has posted a copy of a memorandum about the topic on its section of the NAIC website.
Robert Carcano, SVO senior counsel, wrote the memo and addressed it to Matti Peltonen, chair of the task force, and to other task force members and other interested persons.
The SVO is an arm of the NAIC that helps regulators evaluate insurance company investments by classifying the riskiness of many investment vehicles.
The NAIC lets insurers decide whether to use the ratings issued by credit rating agencies as “triggers” for changes in the terms of private contracts.
But the NAIC prohibits insurers that are acting as lenders from using changes in SVO risk classification designations of the borrowers as triggers for renegotiating loan terms.
If an insurer uses information about an SVO designation change against a borrower, that “would have the effect of transforming an analytical decision with regulatory implications made by the SVO on behalf of regulators into the catalyst for an economic impact on a private party,” Carcano writes. “This, in turn, would increase the potential for NAIC legal liability, given that an issuer might allege that a credit opinion expressed by the SVO, or indeed the failure of the SVO to update a credit opinion, precipitated, either independently or in tandem with other events, funding issues that caused it financial harm.”
As the NAIC sees it, “the SVO is not obligated and is also not organized to bear primary responsibility for monitoring the financial condition of issuers,” Carcano writes.