Monday, June 15, 2009

NAIC Summer Meeting Coverage--Mortgage Factors, Rating Agencies, Suitability And Tight Budgets

Shuttling between the Minneapolis Convention Center and the National Association of Insurance Commissioners host hotel, regulators managed to cover a lot of ground.

RBC Mortgage Factors
The morning started with the American Council of Life Insurers and Nationwide Companies making its case before the Capital Adequacy “E” Task Force to reconsider a temporary mortgage factor used to establish risk-based capital. They had made their case to the Life Risk-based Capital Working Group, to no avail.

The problem is the temporary nature of the change which would alter the factor known as the mortgage experience adjustment factor to a range of 75%-125% from 50%-350%. The ACLI and regulators are working on a permanent fix and this was viewed as a place marker until that work was completed.

John Bruins of the ACLI and Charles Breitstadt of Nationwide Companies argued that the temporary nature of the change for 2009 will create volatility in company portfolios. And, they argued, it is not just the volatility but the uncertainty surrounding what the change will be and how companies should plan for it.
Lou Felice of New York said that the group would leave open the possibility of revisiting the issue if a permanent factor is not found by year end. The discussion followed with the adoption of the proposal.

The group also took up an ACLI proposal on residential mortgage-backed securities addressing how rating agency downgrades in some cases to ‘CCC’ from ‘AAA’ in a fell swoop was impacting RBC charges. And, the problem, according to ACLI, is that by basing RBC charges on ratings, the rating agencies making the assignments look at first dollar losses, not the potential magnitude of loss. Industry is arguing that there should also be an examination of the security’s seniority in the capital structure.

There was a discussion among regulators and industry about how it might be worth considering if RBC was not so tied to rating agencies’ ratings.

Rating agencies
The topic of rating agencies came up again later during the NAIC Industry Liaison Committee when Deirdre Manna of the Property Casualty Insurers Association of America asked whether the NAIC intended to start its own system of rating municipal bonds. Susan Voss, Iowa insurance commissioner and NAIC vice president, said that there was no intention at this time. The NAIC has not filed for NRSRO with the Securities and Exchange Commission, she said. Although she added that the during a visit with the rating agencies, they acknowledged that they had missed the boat on rating many of these securities, a fact she said she found “disheartening.” Manna replied, “we agree that there is a problem with rating agencies, we just don’t think that the NAIC should become one.”

During the exchange, Manna also raised the issue of the NAIC budget, requesting that because of tight budgets and bad times all around, it be zero growth this year. Voss said that there is a careful line by line look at how the NAIC can save money and said that she would make industry’s concerns known.

Suitability came up again in the Life & Annuities “A” Committee. The ACLI took another pass at getting an exposure draft of the latest suitability model put aside in favor of creating a guidance document. The Insurance Marketplace Standards Association’s Don Walters expressed support for the idea but the “A” Committee wasn’t convinced. Its members plan to continue with the development of a model. Birny Birnbaum, an NAIC funded consumer and executive director with the Center for Economic Justice noted how the previous model was a 4-year “struggle from the get go.” He asked why IMSA couldn’t create guidance to the exclusion of the development of a model. And, then he questioned IMSA, saying that it is supposed to be “an honest broker which monitors insurance. “It would be a grave mistake to do anything to stop what the working group is doing and offer interpretive guidance. What is it anyway, but a desk draw rule that the industry has asked [regulators] to stop doing.”

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