Insurance Regulators May Reduce Use of Rating Firms (Update2)

By Andrew Frye
Bloomberg News
April 3, 2009

April 3 (Bloomberg) -- U.S. state insurance regulators may reduce their dependence on firms including Standard & Poor's and Moody's Investors Service, saying they are looking into ratings "shortcomings."

The National Association of Insurance Commissioners has assigned a group to explore "the reasons for recent rating shortcomings" and "the problems inherent in reliance on ratings," the group said in a statement on its Web site.

The watchdogs are conducting their review after insurers' portfolios were buffeted by downgrades to commercial mortgage- backed securities held to help back policies. Regulators currently rely on ratings assigned by S&P, Moody's and other firms when calculating the amount of capital insurance companies must hold to protect against losses on CMBS and other so-called structured securities.

The potential that insurers will need more capital because of downgrades "is on our radar screen," NAIC President Roger Sevigny said in an interview. New York Insurance Superintendent Eric Dinallo and Michael McRaith, director of insurance for Illinois, are heading the NAIC group, which was set up "for this very sort of thing," Sevigny said.

Life insurers have reported losses and profit declines as the worst financial crisis since the Great Depression pushes down the value of investments. Earlier this year, state regulators granted looser capital requirements to carriers including Principal Financial Group Inc. and Hartford Financial Services Group Inc. after stock drops made raising private funds more expensive.

'Constructive Dialogue'

Regulators are seeking to "engage the rating agencies in a constructive dialogue," McRaith said.

Abbas Qasim, a spokesman for Moody's, and Edward Sweeney, a spokesman for S&P, had no immediate comment.

Lawmakers and regulators have criticized rating firms for conflicts of interest that may have led to excessively high bond ratings and a failure to warn investors about default risks. Financial institutions have taken $1 trillion in credit losses and writedowns spurred by the collapse of subprime mortgage securities, helping push the global economy into recession.

Dinallo said in a Wall Street Journal op-ed last month that the current rating system is "fundamentally flawed" and leads to inflated credit grades. The cost of paying for bond ratings should fall to buyers of securities, not sellers, Dinallo said.

"Since insurance regulators make very heavy use of those ratings we thought it was important to look to fix where there have been some very obvious problems," said David Neustadt, a spokesman for Dinallo.

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