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Ex-commissioner provides clarification

In his January 2009 “Public Policy Analysis & Opinion” column, Kevin Hennosy wrote concerning the state of state insurance regulation and the condition of the National Association of Insurance Commissioners. His column, which I generally do like to read as a subscriber to Rough Notes, was long on opinion and short on factual or analytical accuracy; and some correction to the record is warranted, if only for the benefit of your readers (changing Kevin’s mind is not on my short list of life goals).

In the article [that month] titled “Imprudence and Roosting Vultures,” Kevin observes that during my tenure as superintendent of insurance, the New York insurance department “lobbied hard for the NAIC to accept without question the investment valuations of [rating agencies].” He says this as if to suggest that the New York department was some kind of cheerleader for the rating agencies. He also insinuates, rather matter-of-factly—but without support—that “the NAIC did weaken its Securities Valuation Office” [SVO] through the activities relating to rating agencies.

Both assertions are inaccurate and misleading to your readers. The New York department did not so much lobby for the exclusive use of rating agency ratings as it was trying to stop the SVO from pretending to independently rate securities. All the while, and for fees that were a great burden to many smaller carriers, the SVO was virtually acquiescing to and affirming most if not all NRSRO [nationally recognized statistical rating organizations] securities ratings on carrier investments. What is the value of a rubber stamp? To the commissioners involved in the overhaul of the SVO at the time, even then it was readily apparent that there was absolutely no value to the ratings oversight being provided by the SVO and that a more practical and useful SVO was necessary.

Kevin neglects to report about the pitched battle between the commissioners and the staff of the SVO to change its mission from one of “me-tooing” NRSRO ratings to one of becoming a world-class financial research facility for insurance regulators, doing truly independent financial analysis to help detect those very things that others—it is now apparent—clearly missed. The entrenched staff of the SVO was either too comfortable with its status quo task or too afraid of a new mission and unsure of its abilities to meet the new mandate to get on board with the modernization of the organization. The one thing they knew full well was that they would most likely outlast the commissioners insisting on change.

Among the missions articulated for the new, revamped SVO that never came to be: Check into the accuracy of ratings by rating agencies, rather than simply parroting them, and investigate the propriety of the new investment vehicles hitting the street.

Further, the column did not talk about the NAIC’s rating agencies working group, suggested and initially chaired by the New York insurance department (which also, by the way, created the first Capital Markets Bureau to do much of the work hoped to have been done by the SVO). This working group, for the first time, attempted to put a bright light on the rating agencies, their practices and their disproportionate power over corporate enterprises. Hearings were held during which rating agency representatives, some for the very first time, provided testimony to and took questions from regulators. Among other things coming out of those hearings, this working group submitted a 40-plus comment letter to the United States Senate Committee on Banking when it was reviewing the NRSRO certification process. By any estimation, this commentary was hardly a letter of recommendation for continuing NRSRO business as usual.

As a measure of my own continued interest in and concern for the disproportionate impact of rating agencies, who no doubt are the real vultures in Kevin’s story and of this sordid economic mess, I wrote to then-NAIC President Sandy Praeger just a few months ago strongly encouraging both the creation of an NAIC rating agency and strongly recommending the reconstitution of the rating agencies working group. This working group, after my departure from the NAIC in early 2005, was short-sightedly subsumed into another NAIC committee. All-in-all, hardly the work of a rating agencies’ captive.

Kevin’s jaundiced outlook on state regulation overall is never fully justified even in his own analysis. The holding company statutes actually have insulated insurance entities from much of the bad behavior of those at the holding company level. This is why people like Treasury Secretary Timothy Geithner have not found it necessary to extend TARP protections and funding to insurers: the state-based system has largely protected insurance companies from much of the financial services industry turmoil, and the guaranty fund system sits as a safety net for those who encounter trouble.

The record is clear that Kevin’s factual recount and analysis of the record is flawed and, therefore, his opinion as put forth in the column is founded upon that defective analysis. I suggest that he keep on writing, but stop long enough to check historical facts before making them the basis of an opinion that he shares with your readers.

Gregory V. Serio
Superintendent of Insurance
State of New York, 2001-2005
Partner
Park Strategies, LLC
New York, New York