The National Association of Insurance Commissioners is preparing to challenge credit graders by overruling the ratings of some assets purchased by insurance companies.
The NAIC, a consortium of state regulators that sets standards for the insurance industry, is considering overruling ratings given by companies such as Moody’s Investors Service and S&P Global Ratings with their own ratings. of an asset, according to an April summary. The proposal will be discussed before the NAIC’s Valuation of Securities Task Force, a group made up of state representatives, on Monday.
If implemented, the new process, which tends to stick to more conservative risk assessments, has the potential to change the ratings of hundreds of asset insurance companies it buys, according to the NAIC. In-house credit analysis applies to so-called outlier assets, or those with rating differences of at least three notches from different credit rating providers. In some cases, the differences can be five notches or more, according to the organization.
“This allows insurers the flexibility to go beyond traditional rated securities, while ensuring that the state’s regulatory system has confidence in the credit quality of the investments,” the NAIC said in a letter.
The outlier asset proposal drew some blowback from major industry stakeholders, including the Structured Finance Association, the American Council of Life Insurers and the National Association of Mutual Insurance Companies, who cited a lack of transparency behind the process and the its liquidity issues. raises concerns.
Republicans in Congress have also expressed concerns about the plan.
Moody’s and S&P did not respond to requests for comment. Fitch Ratings said it has a good relationship with investors and the NAIC and hopes its ratings will continue to prove beneficial.
Securitized Market
“The process is more likely to affect private transactions, where some insurance companies are increasingly using securitization technology to be efficient with their regulatory capital,” David Goodson, head of securitized credit at Voya Investment Management said in an interview.
The impact of broad syndicated securitization should be minimal, according to the NAIC. However, the organization still maintains a heavy influence on how insurance companies invest in the securitization market.
“The NAIC is very active in securitization,” Goodson said. “They are taking several initiatives that will affect the securitization market in the coming years, including the collateralized loan obligation market, residual asset classes and changes to the Exemption Filing process.”
The outlier asset proposal is likely to be adopted this year or early next year, but actual implementation is unlikely to happen until 2026, according to the watchdog.
Apart from the current proposal, the group decided to defer their own risk assessments of residential and commercial mortgage-backed securities after the Great Financial Crisis.. The watchdog is also working on a new proposal to revise the asset capital requirements for CLOS purchased by insurance companies.
The NAIC’s move to use its own ratings for insurance companies did not come out of the blue. Following the GFC, the group made the decision to delay their own risk assessments of residential and commercial mortgage-backed securities. In 2022, they again propose to transfer their own credit analysis for structured equity funds.
Photo: Photographer: Al Drago/Bloomberg
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