How Will the Insurance Regulators React? - Part Two
"…the swings in almost all financial markets this month have made dispersed risk suddenly morph into dispersed mistrust." -The Economist, August 16, 2007
"The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown." - H.P. Lovecraft
As markets seek to recover from what one hopes is the bottom of the fear/greed cycle, it may be worthwhile to continue thinking about how the insurance regulators will react. In my prior post, I noted the potential huge problems in valuing securities in an illiquid market. Apparently, the SVO and the NY Insurance Department have been thinking about valuation long before the current market.
Back in November, 2006 the Valuation of Securities Task Force of the NAIC exposed for comment a valuation proposal that would allow insurers to choose their valuation source and note the source as follows:
"1" - SVO database, "2" - an approved pricing service, "3" - a stock exchange, "4" - a broker or custodian, or "5" - determined by the insurer.
Thank you to Chris Anderson at Merrill Lynch for providing the latest on this interesting valuation proposal from the NAIC. Chris has noted this may be approved at the VOS Task Force as early as next month.
Although a step in the direction, I think a bit more disclosure as to the name of the source might be useful, much as is now required for the broker used on trades. Importantly, this should not result in a ‘wild west’ of pricing, as the SVO would develop a mechanism to compare reported prices for a given CUSIP to those reported by all insurers holding that CUSIP.
Given the current (and potential state of the financial markets at year end), we applaud the SVO and the NY Insurance Department for moving in the right direction. Transparency and disclosure are a strong antidote to fear and mistrust.
September 7th, 2007 at 7:18 am
There’s something else the NAIC should be worrying about (but probably isn’t). How much of the losses in the sub-prime and other asset-backed markets are going to end up as underwriting claims. Banks are already being sued for having sold on as bonds loans that had insufficient due diligence, or were badly described to the bond buyers. This could be a lot more expensive that the losses on the asset side of the balance sheet.
David