Consumer advocates today railed against a proposal that would change the way insurance regulators assess the amount of capital carriers hold against residential-mortgage-backed securities.
Consumer advocates today railed against a proposal that would change the way insurance regulators assess the amount of capital carriers hold against residential-mortgage-backed securities.
Under the proposal, pitched recently to the National Association of Insurance Commissioners by the American Council of Life Insurers, insurance regulators would no long use credit ratings from the major ratings agencies when looking at carriers' holdings of residential-mortgage-backed securities to determine how much capital insurers should hold against them.
In a joint statement, the Center for Economic Justice and the Consumer Federation of America called for the National Association of Insurance Commissioners to reject the plan as injurious to consumers.
“We oppose this proposal because it is yet another bald attempt by life insurers to change the rules — rules the life insurers once championed — to provide capital relief to insurers at the expense of consumer protection,” the groups said in the statement.
Though the ACLI had argued that the current system of using credit rating agencies' assessments is flawed because it looks at the possibility of loss rather than the severity of that loss, consumer advocates questioned why residential-mortgage-backed securities were receiving so much scrutiny.
The advocates also questioned why carriers failed to apply similar standards to other asset-backed securities, like those backed by credit loans and auto loans.
“It is not because the ACLI wants to improve the quality of solvency regulation, but because the ACLI wants capital relief from the capital requirements for this class of securities,” the groups said.
“It is inconceivable that regulators would consider capital relief for these very risky securities, given projections for continued high employment, mortgage defaults and mortgage disclosures,” the consumer advocates wrote. “Mortgage delinquencies and defaults have moved through sub-prime and Alt-A loans and are now increasing most rapidly in prime mortgage loans.”
Ratings agencies' frequent downgrades on these securities have forced insurance companies to post $11 billion against the investments for the first six months of 2009, carriers claim.
"What our proposal is seeking is the most accurate possible rating for RMBS," an ACLI spokesman said in a statement. "Life insurers invest primarily in AAA rated bonds, which had never before experienced a downgrade."
A spokeswoman for the NAIC was not immediately available for comment.
