Bond Market Reform to Provide Accurate Bond Ratings |
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Written by U. S. Insurance News
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Monday, 09 June 2008 |
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The advancement of a regulatory bill by members of the National
Association of Insurance Commissioners (NAIC) should assist insurance
companies by decreasing pressure to sell bonds with reduced value.
Starting July 1, the new amendment by the National Association of Insurance Commissioners (NAIC), will allow municipal bond holders to submit downgraded bonds to the Securities Valuation Office (SVO) for a new credit assessment. Presently, when a bond insurer is downgraded, the municipal bonds it insures are also downgraded which often leads to inaccurate credit ratings of the municipal issuer.
The proposal is one of a three part solution to the recent bond market problem. Part one works to keep AAA-rated bonds accessible to municipalities. The second part strives to boost capital reserves of companies with downgraded bonds. The last change involves new and revised rules and regulations.
According to Wisconsin Insurance Commissioner Sean Deilweg, who introduced the proposal, “……many municipal bond credit ratings are no longer accurate because they are based on the downgraded rating of the bond insurer, not of the municipal issuer. So we are stepping in to make sure that insurance companies have accurate ratings. The SVO has the tools to fairly rate municipal issuers.”
Insurance companies are often burdened with municipal bonds as they have to hold more capital in their reserves if the bonds are downgraded. As municipal bonds are downgraded below the investment grade, they become less attractive to investors and insurance companies who no longer want to retain them. The value of bonds can be further decreased as the market becomes saturated with sellers.
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