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Insurance Group Rethinks Role of Credit Raters

By Sally Maison
Published: Friday, October 2nd, 2009

The National Association of Insurance Commissioners is evaluating the role of credit rating agencies in determining risk levels of policyholders. Members of NAIC rely heavily on rating firms in evaluating the likelihood of a client to file a claim. The convention was formed in response to critic statements and recent developments in court proceedings.

Insurance Group Rethinks Role of Credit RatersNAIC members met earlier this week in Harbor City, Maryland to discuss other options in assessing the risk levels of fixed-income securities. The meeting, which lasted a whole day, was attended by insurance providers from all over the United States. NAIC members gathered together after the volume of criticisms against credit rating firms have risen considerably, the most notable of which is a statement is from a former employee of a credit rating giant.

Former Moody’s Managing Director Eric Kolchinsky asserted that Moody’s Investor Services provides biased ratings to consumer and businesses alike. Kolchinsky says that the firm places greater importance on profit than fairness. He also says that Moody’s pressures employees who refuse to follow their scheme. The former director’s statements made in Congress shook the integrity of credit rating firms, which led to distrust and anger among consumers. However, the rating firm denies all allegations against them.

Nonetheless, most participants in this week’s NAIC meeting say that rating systems require an overhaul but they are yet to determine its precise extent. Some members suggest that it should be replaced with a totally new system. Meanwhile, a Texan consumer advocacy group suggests that NAIC use its Securities Valuation Office. Center for

Economic Justices says that SVO can do the evaluation of structured securities. But the managing director of SVO says that it lacks the fund to do so. He also said that their office does not have direct contact with issuers of securities since they rely solely on insurers to give them that kind of information.

NAIC has not yet established a timetable regarding the development of their proceedings. A representative says that they are taking their time because they want to be very thoughtful and deliberate regarding the issue.

The new date for the hearing on credit rating firm practices is yet to be released by House Oversight and Government Reform Committee. Last week’s hearing was postponed after Republican representatives say they need more time to evaluate witness testimonies.

Rating organizations are expected to bring everything to court that will preserve their integrity. But consumer advocates say that it will be very difficult for firms to regain public trust.

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