The National Association of Insurance Commissioners (“NAIC”) recently concluded its summer meeting, which took place from August 12 to 16, 2023. The Valuation of Securities (E) Task Force (the “VOS Task Force”) and other committees continued to move forward on several items with possible implications for the securities markets. These include a proposal from the Securities Valuation Office to create a process for challenging a NAIC designation (“NAIC Designations”) derived from a rating provided by a Nationally Recognized Statistical Ratings Organization, and a proposal to exclude “Structured Equity and Funds” from the filing exempt process. Furthermore, a financial modeling process for collateralized loan obligations continues underway, as such products will no longer qualify for filing exempt status and will be subject to a financial modeling process, effective from January 1, 2024. Additionally, the Statutory Accounting Principles (E) Working Group finalized the principles-based definition of a long-term bond and adopted bond proposals that will take effect on January 1, 2025.


By way of background, the U.S. insurance industry is primarily regulated at the state level. The NAIC is the group pursuant to which the chief insurance regulators from the 50 states, the District of Columbia, and five U.S. territories, come together to set standards aiming at promoting better coordination and consistency among states in regulating the insurance industry. The NAIC provides expertise, data and analysis to help insurance commissioners effectively regulate the industry and protect consumers.

Through the Securities Valuation Office (“SVO”), the NAIC is responsible for the daily assessment of credit quality and valuation of securities owned by state-regulated insurance companies. SVO assigns NAIC Designations, which are critical in determining risk-based capital requirements, influencing investment limitations and affecting the valuation of securities on an insurer’s balance sheet, to approximately 200,000 securities annually. For investments rated by one or more of the Nationally Recognized Statistical Ratings Organizations (“NRSROs”), the NAIC Designation is mapped directly to that rating without further analysis or oversight. These are known as “filing exempt” securities. However, for unrated investments, SVO provides centralized credit analysis and supplies the corresponding NAIC Designation.

The NAIC has indicated that while reliance on NRSROs offers efficiency, such reliance is not absolute as its risk-based capital system is directly tied to the strength of investments. The evolving nature of insurers’ investment strategies and concerns about “rating shopping” have led the NAIC to consider whether a higher risk-based capital charge is appropriate given the increased risk in insurers’ investment portfolios and discrepancies between the ratings provided by competing NRSROs for the same security.

Proposal to Establish NAIC Designation Challenge Process

In response to these concerns, the VOS Task Force, responsible for, among other things, maintaining and revising the Purposes and Procedures Manual of the NAIC Investment Analysis Office (“P&P Manual”), has received a proposed amendment to the P&P Manual from SVO that would establish a process by which to challenge the accuracy of NAIC Designations for filing exempt securities. Specifically, the proposed amendment would allow a state insurance regulator or Investment Analysis Office (“IAO”) staff to challenge a NAIC Designation assigned through the filing exemption process that “does not provide a reasonable assessment of risk for regulatory purposes.”

The proposed process includes:

  • A materiality threshold: SVO would flag a security or NAIC Designation if it determined that such NAIC Designation is three or more notches different than SVO’s assessment.
  • Electronic identification: Insurers would be notified of a NAIC Designation of concern via the NAIC’s platform.
  • Notice period: Insurers would have up to 120 days to provide information or engage in discussions with SVO about the security and NAIC Designation before SVO makes a determination.
  • Review process: SVO would implement a formal review process, with an opportunity for applicable insurance regulator(s) to consult on the deliberation, if so requested. SVO could include a comparison to peers rated by different rating providers, the consistency of the security’s yield at issuance or current market yield with securities having equivalently calculated NAIC Designations rated by different credit rating providers, SVO’s assessment of the security using available methodologies and any other factors it considers relevant.
  • Appeals process: If SVO were to stand by its original position, insurers would have an opportunity to appeal or, as was suggested at the summer meeting, suggest a second rating by a different agency that is consistent with the original rating.
  • Annual report: SVO would provide a report to a regulator-only meeting of the VOS Task Force summarizing the NAIC Designations and securities removed from filing exemption eligibility over the prior calendar year and the reason for the removal.

It is important to highlight that throughout this process, the challenged NAIC Designation would remain in place until SVO reaches a decision. In addition, a security could be reassessed in a subsequent filing year upon application by an insurer.

SVO’s proposal to increase its authority over securities exempt from filing received several comments from concerned market participants, including the American Council of Life Insurers, Private Placement Investors Association, National Association of Securities Valuation Analysts, Structured Finance Association, Mortgage Bankers Association and Commercial Real Estate Finance Council, which submitted a joint comment to the exposed proposal. The industry organizations expressed the need for more transparency, potential lack of oversight, the initiation of the ratings challenge process based on limited information, the need for a separate appeal process with independent oversight and the lack of a mandate for staff to publicly report aggregate statistics for ratings challenges. Other comments suggested that the discretion embedded in the proposal could deviate from the NAIC’s appropriate role in insurance regulation and potentially lead to staff-driven agendas, as well as concerns about potential disruption to competition among NRSROs. The NAIC leadership defended its proposal, stating that it would not expect any competitive imbalance for NRSROs as its work is intended for regulatory purposes, specifically to determine appropriate capital charges, and would not be disclosed to the public or the broader capital markets.

Impacts to Rated Note Funds and Other Structured Products

The NAIC Designation challenge process, although unexpected, aligns with the NAIC’s trend of exerting greater control over the filing exempt process. The NAIC Designation challenge process itself emerged from earlier discussions about removing “Structured Equity and Funds” from the filing exempt process, which would require insurers to submit all notes issued by rated funds and a wide range of additional structures that fall under “Structured Equity and Funds” to SVO for determining the appropriate NAIC Designation. In response to industry feedback, the VOS Task Force directed SVO to better define the asset categories to be excluded from the filing exempt process and to introduce a system by which SVO could identify different levels of review for securities based on their specific characteristics.

In addition, though not discussed during the August meeting, a financial modeling process for collateralized loan obligations (“CLOs”), which became ineligible for filing exempt status through an amendment approved by the NAIC’s Financial Condition (E) Committee, remains underway. Under this new system, CLOs will be subject to a financial modeling process by SSG, effective from January 1, 2024. To implement these changes, the VOS Task Force created an ad hoc committee to develop the specific modeling methodology. The committee, which regularly updates the VOS Task Force, continues to hold meetings to work on the technical aspects of such methodology. The focus of the CLO modeling process is primarily on the rated notes of a CLO, which would be assigned an NAIC Designation.

For its part, the Statutory Accounting Principles (E) Working Group, tasked with the development and adoption of substantive, nonsubstantive and interpretive revisions to the NAIC Accounting Practices and Procedures Manual, finalized the principles-based definition of a “long-term bond,” which will take effect on January 1, 2025. As a result of this update, insurers will need to evaluate their assets and make necessary determinations and adjustments before this date. This change is particularly significant for rated funds and other Structured Equity and Funds, including structures like collateralized fund obligations (“CFOs”), which should note that there is a rebuttable presumption that debt collateralized by equity interests is not considered a long-term bond, which could affect master-feeder structures and CFOs. Key considerations for this analysis include overcollateralization, covenants (note to value tests, etc.), diversification of equity interests, capitalization of interest, sources of expected cash flows to service the debt (i.e., dividend distributions from the underlying collateral vs. sale of the underlying collateral), and available liquidity facilities.


The potential approval by the VOS Task Force of a proposal allowing SVO to override an NAIC Designation based on an NRSRO rating marks a significant regulatory shift for securities exempt from the NAIC filing process. The NAIC defends this as a necessary measure to ensure proper capital charges and reduce over-reliance on credit ratings. However, we anticipate that these changes could introduce uncertainty into insurers’ investment processes, potentially leading to negative impacts on the securities market. We believe a better approach is to provide clear upfront standards and criteria for investment structuring, rather than the NAIC’s proposed “relief valve” approach, which substitutes their judgment for that of the NRSROs after the fact. At a minimum, we hope for a transparent ratings override process with adequate safeguards and challenge rights. As discussions on these proposed changes continue, it is vital for industry professionals to monitor these developments closely and express their concerns to trade associations, including the American Council of Life Insurers.