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October 28, 2011 at 09:50 AM
The NAIC could be making a major investment in expanding its financial modeling capability, according to its proposed 2012 budget released Thursday, in an effort to decrease its reliance on outside firms that do financial modeling for structured securities.
Currently, the NAIC relies on outside vendors with whom it works well but who are costly, although much of the cost is offset with insurer assessments on the securities.
If it chooses to move forward on an initiative to enhance its financial modeling capabilities, the NAIC will require investments in data compilation, financial models, data processing infrastructure, and experienced staffing, the organization said.
No decision has yet been made, the budget language cautioned. See more on the NAIC’s budget at http://www.lifehealthpro.com/2011/10/28/naic-suffers-dip-in-investment-income-its-budget-o
The decision whether or not to move forward with expanding the financial modeling capability of the Capital Markets and Investment Analysis Office in New York will be based on a combination of financial, operational, and strategic considerations, it said.
“Given the inability of the NAIC to rely on rating agencies and the NAIC’s current lack of expertise to model these scurities internally; the NAIC must rely on external financial modelers who have the systems, processes, data and expertise to evaluate thee securities,” the NAIC stated.
Currently, the NAIC must rely on external financial modelers to evaluate structured securities because of the inability to rely on the rating agencies any longer. The federal Dodd-Frank Wall Street Reform and Consumer Protection Act reduced the influence of the national recognized statistical rating organizations (NRSRO), requiring regulatory agencies to eliminate their reliance on the NRSRO ratings.
However, one of the main advantages of being independent of the rating agencies is “the ability to participate in the selection of macroeconomic assumptions, which can be used to create economic scenarios within defined parameters.” The NAIC is using this advantage to form partnerships with financial modelers and leverage their expertise.
The NAIC’s structured securities project is a major undertaking for the NAIC and has had, and will continue to have, a significant impact on insurance regulators, insurance companies, third party administrators, and NAIC staff, the NAIC stated. The 2011 process will be very similar to the 2010 process but with improvements, the NAIC said, based on feedback from insurers and interested parties.
