NAIC Financial Condition Committee Approves Report on Nationally Recognized Statistical Ratings Organizations’ Credit Rating Risks

The National Association of Insurance Commissioner’s (“NAIC’s”) Financial Condition Committee (“Committee”) met by teleconference on April 28, 2010, during which it adopted the Committee’s Rating Agency Working Group (“Working Group”) revised final report on risks associated with NAIC reliance on Nationally Recognized Statistical Ratings Organizations’ (“NRSRO”) credit ratings.

The report presents the Working Group’s findings on:

• The problems inherent in reliance on ratings, including their impact on the filing exempt process and risk-based capital;
• The reasons for recent rating shortcomings, including but not limited to structured security and municipal ratings;
• The current and potential future impact of ratings on state insurance financial solvency regulation; and
• The effect of the use of NRSRO ratings on public confidence and public perception of regulatory oversight of the quality of insurance.

The report also summarized the Working Group’s recommendations that:

• Regulators explore how reliance on Acceptable Rating Organizations ratings can be reduced when evaluating new, structured, or alternative asset classes, particularly by introducing additional or alternative ways to measure risk;
• Alternatives be considered for regulators’ assessment of insurers’ investment risk, including expanding the role of the NAIC Securities Valuation Office; and
• When considering continuing the use of ratings in insurance regulation, the steps taken by NRSROs in correcting the causes that led to recent rating shortfalls should be taken into account, including the NRSROs’ efforts in implementing the recommended structural reforms.

Participants in the April 28 meeting recommended no further changes to the revised report.  No questions about it were raised.

Although the report and recommendations had been presented to the Committee at the NAIC 2010 Spring National Meeting, it was suggested that the Working Group should augment its mission to include monitoring the implementation of its recommendations and related work.   This additional charge was approved.

A reporting chart that includes a complete list of recommendations will be used to guide the Working Group in the next phase of its work.   To view the recommendations reporting chart, April 28 Committee agenda and Working Group report, click here.

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