The results of the NAIC’s survey of insurance departments across the US is in, and the answer is the Model Investment Law, which only took over five years to write, needs a serious overhaul.  Without going into the answer to every detailed question, about 90% or more of the states wanted to see changes in the following:

- Special designations/asset class treatment for structured securities

- Current maximum of 45% of assets for first mortgage loans and income producing property

- Diversification rules where the investments are insured by mono-line insurers.

- Securities lending limits

- Specific limits for hybrid securities

- Include credit risk from Credit Default Swaps in credit risk limits

- Pledged asset limitations

The states were also asked for suggestions of other areas for change and they did not hold back on this, as they included:

- Investment pools, BA assets, FHLB pledged assets, basket clause, auction rate securities, foreign sweep accounts, internal controls, prudence evaluation criteria, standards found in the ‘prudent person’ version of the Model Investment Law.

Tellingly, the states noted additional areas where they needed guidance on defining certain asset classes, including:

- securities lending, hybrids, pledged assets, CDS, mutual fund treatment, bank sweep accounts

If there is some good news here, it is that only about half the states wanted to make the Model Investment Law the law of their state and an accreditation standard.  That’s about where we are today with Model Investment Law adoption, so the ‘good news’ is really ‘no news’.

My guess is that the NAIC will eventually begin the process of ameding the Model Investment Law - with more changes than are even noted in this survey.  We’ve talked about it before in this blog, but we’re looking at a long slog to adoption.  During that time, we expect insurers will keep one eye on their portfolio and the other on what the NAIC is mulling over doing to that portfolio. 

Recently, with changes to statutory accounting rules and capital relief via their joint venture with PIMCO on structured securities, the NAIC has acted like ‘captured’ regulators.  However, as the economic recovery continues, they may start to seem less ‘captured’ and more ‘capricious’ in their approach to investments.