The National Association of Insurance Commissioners is gearing up to challenge credit graders by overruling ratings on certain assets bought by insurance companies.

The NAIC, a consortium of state regulators that sets standards for the insurance industry, is considering overruling the ratings provided by companies such as Moody’s Investors Service and S&P Global Ratings with their own valuation of an asset, according to an April summary. The proposal will be discussed before the NAIC’s Valuation of Securities Task Force, a group consisting of state representatives, on Monday.

If enacted, the new process, which is likely to stick to more conservative risk evaluations, has the potential to alter the ratings of hundreds of assets insurance companies buy, according to the NAIC. The in-house credit analysis would apply to so-called outlier assets, or those with ratings discrepancies of at least three notches from different credit rating providers. In some cases, the differences can be five notches or more, according to the organization.

“This allows insurers the flexibility to go beyond traditional rated securities, while ensuring that the state regulatory system has confidence in the credit quality of those investments,” the NAIC said in a letter.

The outlier assets proposal has garnered some blowback from major stakeholders in the industry, including the Structured Finance Association, the American Council of Life Insurers and the National Association of Mutual Insurance Companies, who cite the lack of transparency behind the process and the liquidity issues it raises as concerns.

Republicans in Congress have also voiced concerns about the plan.

Moody’s and S&P didn’t respond to requests for comment. Fitch Ratings said it has a good relationship with investors and the NAIC and expects its ratings will continue to prove useful.

Securitized Market

“The process is more likely to affect private transactions, where some insurance companies are particularly active using securitization technology to be efficient with their regulatory capital,” David Goodson, head of securitized credit at Voya Investment Management, said in an interview.

The impact on broadly syndicated securitization should be minimal, according to the NAIC. However, the organization still maintains a heavy influence in how insurance companies invest in the securitization market.

“The NAIC has been very active in securitized,” Goodson said. “They have undertaken several initiatives that will affect the securitization market for years to come, including the collateralized loan obligation market, residuals across asset classes and changes to the Filing Exemption process.”

The outlier assets proposal is likely to be adopted this year or early next year, but the actual implementation would likely not take place until 2026, according to the watchdog.

Aside from the current proposal, the group decided to defer to their own risk assessments of residential and commercial mortgage-backed securities following the Great Financial Crisis. The watchdog is also working to create a new proposal to revamp asset capital requirements for CLOS bought by insurance companies.

The NAIC’s move to use its own ratings for insurance companies is not coming out of the blue. Following the GFC, the group made the decision to defer to their own risk assessments of residential and commercial mortgage-backed securities. In 2022, they once again suggested turning to their own credit analysis for structured equity funds.

Photo: Photographer: Al Drago/Bloomberg