Spotlight on Rating Agencies

The role of rating agencies in state insurance regulation will come under the spotlight at a public hearing to be held by the National Association of Insurance Commissioners (NAIC) tomorrow. The public hearing comes on the same day as a Congressional hearing before the House Committee on Oversight and Government Reform titled “Credit Rating Agencies and the Next Financial Crisis.† The Congressional hearing follows growing scrutiny of rating agencies in the fallout from the financial crisis. Three state attorney generals are also reported to have begun investigations into major credit rating agencies to discover among other things, whether they acted improperly by assigning triple-A ratings to mortgage-backed securities that later proved highly risky or in some cases worthless. As part of the process of ensuring solvency of regulated insurance companies, the NAIC and the states use ratings to determine the risk-based capital charge for rated bonds, as well as setting many limits for insurance company risk exposures. The economic crisis has resulted in steep rating downgrades and drops in asset values and the NAIC’s Rating Agency Working Group will determine what changes, if any, are warranted in how insurance regulators use the ratings. Representatives from the major credit rating agencies including A.M. Best, DBRS, Fitch Ratings, Moody’s Investors Services, and Standard & Poor’s are expected to participate in the hearing, in addition to a representative from the Securities and Exchange Commission (SEC). Just last week the SEC  voted in favor of  new measures to strengthen oversight of credit rating agencies by enhancing disclosure and improving the quality of ratings. For more on the NAIC hearing, check out an online article at National Underwriter by Daniel Hays.

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