The National Association of Insurance Commissioners should work with states to reduce state-law reliance on the big credit rating agencies, an NAIC panel says.
The Rating Agency Working Group makes recommendations about reliance on the work of the “nationally recognized statistical rating organizations, or “acceptable rating organizations,” in a report adopted by the NAIC’s Financial Conditions Committee.
The working group recommends that several working groups at the NAIC, Kansas City, Mo., should take actions to change the way insurers and regulators use ratings.
The working group was formed in February 2009, in the wake of a credit market crisis that rocked the U.S. financial system.
The Investment of Insurers Model Act Revision Working Group should “consider encouraging state regulators to identify references to AROs in state insurance laws and to consider proposing modifications that refer to alternative risk assessment methods or providers so as to lessen reliance on AROs,” Rating Agency Working Group members write in their report.
The NAIC Valuation of Securities Task Force “should continue to develop independent analytical processes to assess investment risks,” the Rating Agency Working Group members write. “These mechanisms can be tailored to address unique regulatory concerns and should be developed for use either as supplements or alternatives to ratings, depending on the specific regulatory process under consideration.”
“ARO ratings have a role in regulation,” the working group members write. “However, since ratings cannot be used to measure all the risks that a single investment or a mix of investments may represent in an insurer’s portfolio, NAIC policy on the use of ARO ratings should be highly selective and incorporate both supplemental and alternative risk assessment benchmarks.”
The NAIC should consider for example, whether to expand use of the NAIC’s own in-house Securities Valuation Office, working group members write.
The NAIC’s SVO Initiatives Working Group should “consider whether the NAIC should establish a not-for-profit rating agency where ARO rating coverage is not adequate,” Rating Agency Working Group members write.