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S&P Puts Off Effort to Develop Tougher Life Insurer Grading System

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What You Need to Know

  • Rating agencies have been working to improve their methods in response to the Great Recession.
  • One knock against the S&P proposal is that some rules could have been too harsh.
  • Another concern is that S&P could have favored investments it had rated over investments it had not rated.

S&P Global Ratings is backing away from a battle with regulators and life insurers over a grading system update.

The New York-based rating agency has been trying to adopt new, tougher insurer risk-based capital adequacy criteria, to look harder to see how well any given insurer might perform in dire circumstances.

S&P said Monday that it has decided to withdraw the controversial parts of the proposal, in response to feedback received during a comment period that ended April 29.

“We are considering alternatives for the withdrawn elements of the proposed criteria,” S&P said in an announcement about its decision.

S&P plans to consider the comments received so far, rewrite the proposal and ask for comments on the revision, S&P said.

“At present, we expect to finalize the criteria no sooner than the fourth quarter of this year,” S&P said.

What It Means

S&P will stick with its current approach for evaluating the soundness of insurers’ investments, at least for now.

The Graders

S&P Global, Moody’s Investors Service, Fitch Ratings, AM Best and other firms have been rating the financial strength of insurers, as well as bond issuers and other securities issuers, for decades in an effort to help investors understand the  torrents of securities flowing their way, and to help insurance buyers understand insurers.

S&P Global has been trying to develop new approaches to ratings since the 2007-2009 Great Recession, when investors, regulators and others assigned the rating agencies part of the blame for problems affecting mortgage-backed securities and the markets for mortgage-related derivatives.

Since then, the Securities and Exchange Commission, the Department of Labor and state insurance regulators have tried to reduce their level of dependence on commercial rating agencies, and the rating agencies have tried to respond to investor and regulator calls to making their rating systems tougher and more transparent.

The New S&P Standards

S&P Global posted a request for comments on the current insurance standards draft about five months ago.

The American Council of Life Insurers argued, on behalf of member insurers, that the investment default rate assumptions used in the stressed environment scenarios were too harsh; that the parent company debt limits in the proposal would have been punitive; and that the proposed rules for handling some types of assets, such as corporate-owned life insurance and federal income tax receivables, would have been too strict.

The ACLI has argued that poorly designed, overly conservative criteria could eliminate some popular, useful products, such as annuities, without doing much to improve risk management.

“It is imperative to weigh the benefits of such criteria against the potential cost to consumers who rely on long-duration products like annuities and life insurance to provide retirement security in societies that lack government-funded pension programs,” the ACLI said.

The National Association of Insurance Commissioners objected to the idea of how S&P incorporated the NAIC Securities Valuation Office in the rating framework and argued that the SVO is different from a rating agency. The SVO helps regulators understand the credit quality of the bonds and other investments in regulated insurers’ investment portfolios.

Reaction

Fitch welcomed S&P’s decision to revamp the rating criteria update proposal.

“We are pleased to see that S&P has implicitly admitted they had no basis for the proposed actions in insurance after resounding objections from the market and the Department of Justice to their proposal,” a company representative said. “We hope S&P will now ‘consider alternatives; for the same types of practices they employ in rating local government investment pools (LGIPs) and that both S&P and Moody’s will similarly consider alternatives to their positions on collateralized loan obligations (CLOs). We believe it is about time that local governments and other investors are allowed to choose the securities they buy without anti-competitive pressure from S&P and Moody’s.”

Correction: An earlier version of this article gave an incorrect description of the NAIC’s position on the S&P propose. The NAIC disagrees with the idea of equating the NAIC Securities Valuation Office with a rating agency.

(Image: kan_chana/Shutterstock)