Monday, May 11, 2009

Model Investment Law Getting A Second Look

The financial meltdown last fall that took down investment banks and American International Group, New York, in part due to investments in credit default swaps and securitized investments prompted state insurance commissioners to take another look at laws that govern what investments insurers own.

That work has started this week with a discussion among regulators. The Model Investment Law or more formally known as the Investment of Insurers Model Act may be getting a makeover following a review by regulators at the National Association of Insurance Commissioners, Kansas City, Mo. A working group is at stage one of a two stage process: first determine if changes need to be made and then determine what those changes should be.

The focus of the work will be narrow, according to the NAIC’s Bob Carcano. It will not involve looking at risk-based capital charges. A report by the NAIC’s Kevin Driscoll reviewed the growth of securitizations to $40 billion from $22 billion over the last 15 years and noted that mortgage delinquencies could stand at 6-8% by the end of 2010. It is possible, according to the report, that junior securities related to mortgages could drop 4-5% and speculative securities could be downgraded 5-6 rating notches depending on the securities.

Driscoll noted that in fiscal year 2009, all hybrid security holdings will now have to be classified as bonds.

Among the possible actions to be considered would be to review the structured security asset class, to review the amount of assets of guarantors that companies could hold and whether there should be a limit for hybrids.

The report is being exposed for 90 days, as suggested by Carl Wilkerson of the American Council of Life Insurers, Washington.

Doug Barnert, executive director of the Group of North American Insurance Enterprises, New York, an industry expert who was involved in the initial development of the Model Law, adopted in October 1996, recommended face-to-face discussions as the most productive way to advance talks.

Barnert also asked if the working group had differentiated between the two model laws: one with defined standards and one with defined limits. Barnert recommended looking at both models during the discussion and identifying which one was being discussed as talks advance.

The working group also discussed sending out a survey to states on the issue.

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