SEC Worries About Rating Analyst Overload

One of the threats facing your clients’ life insurance policies and annuity contracts could be rating analyst overload.

Officials at the Office of Credit Ratings, an arm of the U.S. Securities and Exchange Commission, talk about that danger in a new report on the state of nationally recognized statistical rating organizations, or NRSROs.

“Rating surveillance processes came under stress during COVID-19 due to rapidly changing information and declining performance in some sectors, which may have required additional surveillance reviews,” SEC officials wrote in the new report.

One potential risk is the “possibility that NRSROs may have adjusted assumptions or streamlined surveillance processes without sufficient controls,” as a result of the pandemic, and another potential risk is the “possibility that increased analyst workloads could result in failures to adhere to applicable surveillance policies and procedures,” officials noted.

What It Means

COVID-19 could have done — and may still be doing — all sorts of harm to your clients’ life and annuity arrangements, partly by increasing the workloads and stress levels of insurance company underwriters, asset managers, claim processors, rating analysts and other people associated with the insurance sector, or who have other jobs with a direct or indirect effect on insurance companies.

The NRSROs

NRSROs are SEC-registered firms that assess the health of financial institutions, corporate borrowers, asset-backed securities issuers, government securities issuers and insurers.

The firms are often referred to as “rating agencies.”

The SEC publishes reports on the NRSRO sector every year in connection with the Credit Rating Agency Reform Act of 2006.

NRSRO Data

In 2022, 10 rating agencies were operating as NRSROs. Those 10 NRSROs issued 2.2 million ratings of all kinds in 2021, or 1.2% more than they issued in 2020, according to SEC data.

The number of insurance ratings fell 1.3%, to 20,962.

The SEC classified three of the firms — S&P Global Ratings, Moody’s Investors Service and Fitch Ratings — as large, based on U.S. rating services revenue, and seven as medium or small.

The SEC thinks of A.M. Best Rating Services as being a medium NRSRO, but it pointed out that Best ranked first in the insurance rating category in 201, with 7,286 insurance-related ratings, or 35% of all insurance ratings.

S&P ranked second, with 6,919 ratings.

Small and medium SROs collected 6.7% of reported NRSRO revenue in 2021, up from 5.9% in 2021.

Problems

In accounts of enforcement actions and exam findings, SEC officials noted that the rating agencies sometimes have had problems with matters such as recordkeeping; credit rating formula errors; accidentally information to the wrong people; failing to publish information that should be public; and letting rating services sales reps communicate with the rating analysts.

Pictured: Heena Abhyankar, Carmi Margalit and Neil Stein talked about the business conditions facing U.S. life and annuity issuers Jan. 26, at a conference in New York. (Photo: Allison Bell/ALM)