Moody’s has angered insurance regulators by refusing to appear at a regulatory hearing later this week in National Habor, Maryland. And now regulators are threatening to strip the ratings agency of its status as an acceptable ratings agency for use by insurance companies.
The story broke over the weekend, when New York State deputy superindendent for insurance Hampton Finer told Reuters on Saturday that the regulators would discuss dropping Moody’s. Both Fitch and S&P agreed to appear at the meeting.
“If we don’t feel like we can get answers to our questions, the question is if we should put them on our ARO (acceptable rating organisations) list,” said Finer.
The insurance business is largely regulated at the state, rather than federal, level. But the National Association of Insurance Commissioners puts forth model rules followed, more or less by most states. These include rules about how much reserve capital insurance companies must hold to guard against the drop in value of certain assets. As in banking regulation, the capital requirements for insurance companies are typically determined by how the securities they hold are rated by the major ratings agencies.
At this stage, this seems like posturing. No doubt if Moody’s believes the state regulators might actually strip the of their position on the ARO–which allows insturance companies to rely on Moody’s ratings–they would immediate kow-tow and come running to the meeing. Finer’s comments are an attempt to bring Moody’s to heel.
Moody’s, Fitch and S&P, the three largest ratings agencies, have come under fire for assigning and maintaining high ratings on mortgage-backed securities, a move which led many to assume the securities were safer than they were and allowed financial institutions to meet regulatory requirements while holding assets that turned out to be far riskier than expected.
All three companies have profited heavily from the oligopolistic status created by a vast array of government regulations, including SEC rules, pension regulation, banking supervisors and insurance regualtions. But while this status may have helped the bottom line in years past, it also made it harder for the ratings agencies to discover their own errant ways, leading to sloppy ratings. Treasury Secretary Tim Geithner has proposed attemting to strip the agencies of their special status.