“We’ve relied too much on rating agencies and in fact, in certain areas, we’re relying exclusively on rating agencies,” Brooks said in an interview. Brooks, who was named the state’s acting insurance superintendent this month, said he’s considering “a lot of ideas,” including expanding the capacity of regulators to conduct their own credit analysis.
Ratings firms came under fire from the National Association of Insurance Commissioners after the financial crisis exposed weaknesses in companies and structured securities once decorated with gold-standard AAA grades. Regulators rely on S&P and Moody’s as they monitor insurers’ portfolios to make sure carriers have enough cash to pay claims on policies ranging from life insurance and mortgage guarantees to earthquake protection.
“When it comes to some of the structured securities, we felt like there was an over-reliance on just their analysis, and we kind of want to change that going forward,” Brooks said. “We’re going to have to expand the sources of analysis.”
Moody’s believes that “disclosure to investors that is complete, reliable and timely would support additional sources of analysis and help all market participants make better- informed decisions,” said Michael Adler, spokesman for the firm. S&P has taken steps to “strengthen our analytics and transparency and to better communicate what risks ratings address” said spokesman Edward Sweeney.
‘Fundamentally Flawed’
Brooks follows Eric Dinallo, who as superintendent of the New York department earlier this year criticized ratings firms and headed an NAIC group reviewing their effect on the insurance industry. Dinallo said in a Wall Street Journal opinion piece in March that the current rating system is “fundamentally flawed” and leads to inflated credit grades.
Ratings on commercial mortgage-backed securities and other structured notes are used by regulators when calculating the amount of capital insurers need to protect against investment losses. Downgrades to CMBS and residential mortgage-backed securities increased capital requirements at a time when insurer results were pressured by investment declines.
Insurers own about $3 trillion of bonds, according to the Insurance Information Institute, which cites 2007 data from the NAIC. MetLife Inc., the biggest U.S. life insurer, had about $62 billion in structured debt in CMBS, RMBS and asset backed securities as of the end of March.
‘Balls in the Air’
Brooks, who was elevated to acting commissioner after serving as first deputy under Dinallo, said in the July 10 interview he would welcome a permanent appointment and plans to be active as head of the department. He identified commercial mortgages as a potential problem for life insurers and said he plans to review compensation curbs placed on the biggest brokers about four years ago by then-attorney general Eliot Spitzer.
“If there’s any message, it’s that I don’t view acting superintendent as a caretaker role,” Brooks said. “This department has a lot of balls in the air, and a lot of initiatives we’re pursuing.”
Life insurers are bracing for further losses on fixed- income investments as the U.S. recession makes it harder for companies and consumers to pay debt. New York-based MetLife and Lincoln National Corp. both have said that defaults on commercial mortgages, which can account for 10 percent or more of a carrier’s portfolio, are poised to rise.
“We’re dealing with problems we couldn’t foresee, and one of them is commercial mortgages,” Brooks said. The commercial property market “creates concerns for us.”
‘Level the Playing Field’
Brooks, in his first week in charge, revised draft regulations on broker compensation that he helped shape under Dinallo. In the interview, Brooks said his goal is to increase fee disclosure by small- and medium-sized middlemen and “level the playing field” that was upended by Spitzer's investigations into bid-rigging and the ban on secret fees negotiated with Aon Corp., Marsh & McLennan Cos. and Willis Group Holdings Ltd.
“Do we need to take a look at those settlement agreements and see where we stand with those? Yes,” Brooks said. “What I need to do is determine whether or not that still works and whether or not it’s required.”