House subcommittee reviews rating agency competition

What do you want to know

  • A witness for S&P argued that some commentators on its new insurance rating proposal seem to assume, incorrectly, that the ratings are all about the same.
  • Representative Brad Sherman proposed creating a board that would choose the rating agencies that produce the top three ratings for a new corporate bond or asset-backed security.
  • Rating agency representatives said the Sherman bill would likely reduce rating agencies’ efforts to compete on the basis of rating quality.

The American Council of Life Insurers would prefer that S&P Global Ratings take a different approach if and when it updates its rules for rating insurer capital levels.

Mariana Gomez-Vock a senior vice-president of the ACLI, gave this assessment on Wednesday during a hearing on the bond rating sector hosted by the House Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets.

Most of the witnesses focused on how S&P’s proposed updated capital adequacy rules may or may not affect the level of competition in the rating industry, and on federal rules and policies that help or hinder the level of competition in the rating industry.

Representative Bill Huizenga, R-Mich., turned the conversation to the proposal’s possible effects on life insurers by referring to reports that the proposal could hurt variable annuities and other long-term products.

“What is the management problem there?” asked Huizenga.

Gomez-Vock said the problem is that life insurers may end up having to meet two major capital adequacy standards: the risk-based capital ratio system of US state insurance regulators and a more close to the European Solvency II system.

The RBC ratio approach in the United States is based primarily on the amount of capital an insurer has, how the assets are invested, and the benefits promised to the insurer.

Solvency II is based on cash flow projections for in-force business, with the assumption that all invested assets will earn the same “risk-free” rate of return.

The Solvency II approach “tends to be hostile to long-term products,” Gomez-Vock said.

What this means

Rating agencies try to help life insurers show that they are likely to be able to deliver on the promises of their insurance policy and annuity contract, by providing facts and analysis to prove that ‘they are well managed and invest in sound investments.

Any major change in rating agency rules could affect the types of products life insurers can write and the cost of the products, although nothing has changed except the rating agency rules.

The S&P proposal

Traditionally, S&P competed primarily with Moody’s and Fitch Ratings in bond ratings, and with Moody’s, Fitch and AM Best in insurance ratings.

The list of Nationally Recognized Statistical Rating Organizations, or NRSROs, recognized by the SEC also includes Japan Credit Rating Agency, Kroll Bond Rating Agency, DBRS, Egan-Jones Ratings and HR Ratings of Mexico.

The National Association of Insurance Commissioners has another type of entity, a securities rating office, which assists state insurance regulators with day-to-day assessments of the credit quality of securities held by insurers. regulated by the state.

S&P sparked policymakers’ interest in ratings industry rules by proposing an update that sets strict rules for how its own raters would use security ratings from outside sources.

S&P suggested that if it hadn’t rated a security, it would start by taking a rating from another NRSR and reduce that rating by one level, or “notch”.

About Myra R.

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