Insurors in the US have been scooping up high interest-rate mortgage bonds. These bonds tend to carry more risk so state insurance regulators are coming forth with new rules requiring insurors who purchase such bonds to boost their capital reserves.
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The National Association of Insurance Commissioners (NAIC) is an organization of state officials that sets standards of solvency. The new capital reserve requirements would make it more costly for insurors to purchase bonds backed by lower quality mortgages and other high risk securities.
Mortgage bonds present a very attractive way to boost yields in insurors’ portfolios. The new capital requirements will factor heavily in the decisions to purchase these bonds going forward.
The new changes would modify the changes made in 2009 when insurors no longer had to use credit ratings from Moody’s, Standard & Poors, and other ratings agencies when determining how much capital they needed to reserve against non-agency mortgage bonds.
The 2009 change was made because many ratings proved to be unreliable and inaccurate. Regulators subsequently hired a unit of PIMCO to determine the risk levels of thousands of residential mortgage bonds.
The NAIC will put its recommendations out for comment this fall. The objective of the task force making the recommendations is to get PIMCO to use a more conservative yardstick in its risk analysis by factoring in a higher likelihood that the bonds would suffer losses during a downturn.
PIMCO says it does not set the criteria used. Its role is solely to provide valuations
for the NAIC based on the economic scenario analysis provided by state regulators.