As if the specter of newly proposed SEC Rules and an investigation by the California Attorney General were not enough of a distraction for the battered credit-ratings industry, the Wall Street Journal reported that some state regulators are mounting a challenge to reduce or eliminate the role credit-ratings agencies play in evaluating the health of an insurer’s portfolio of investment-backed bonds. As one of the largest purchasers of bonds, insurers rely extensively on credit-ratings published by Standard & Poor’s, Moody’s, and Fitch and other SEC designated Nationally Recognized Statistical Rating Organizations (“NRSROs”). Insurance regulators rely on the same credit-ratings to value an insurers portfolio of mortgage backed bonds. The lower the rating the more capital regulators require an insurer hold in reserve to cover future loses.

While no state insurance regulators have presented any firm proposals, regulators are reportedly considering whether to expand the number of firms allowed to provide securities evaluation analysis. This expansion would be a marked departure from the insurance industry’s exclusive reliance on credit-ratings provided by NRSROs. The potential break-up of the de facto ratings oligopoly will likely foster increased competition among rating agencies, which seems to be a key goal of insurance regulators and NRSROs’ critics.