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NAIC Considering Changes to Solvency Laws

The National Association of Insurance Commissioners (NAIC) is considering changes to insurance solvency laws that could be implemented later in 2012 that would require U.S. insurers to hold more capital against some of their riskier mortgage bonds, which many have scooped up because they have higher yields than other investments
August 31, 2012

The National Association of Insurance Commissioners (NAIC) is considering changes to insurance solvency laws that could be implemented later in 2012 that would require U.S. insurers to hold more capital against some of their riskier mortgage bonds, which many have scooped up because they have higher yields than other investments. Among the possible changes being considered by NAIC include requiring that PIMCO, the firm hired to rate the bonds, use a “conservative bias” in its risk analysis. Another possible change could be to the methodology that rewards insurers for valuing mortgage-bond holdings at prices below face value, which has lowered capital requirements for many securities.

“While there are bonds that don't do so well, the industrywide profile is pretty good,” said Therese M. (Terri) Vaughan, Ph.D., CEO of the NAIC. The NAIC reports that at the end of 2011, insurers held $3.2 billion in capital as backup for $123.2 billion in residential mortgage bonds, but under the old rating system that used ratings from Moody's and Standard & Poor's, insurers would have to hold $18.3 billion in capital for those bonds.