Fintech Insights

At Any Rate – Are You Up to Speed with the Filing Exempt Rule?

November 21, 2018

Navigating investment regulations has always been a challenge for insurance companies. However, the latest revisions to the filing exempt (FE) rule for securities valuation are now making it even harder to achieve compliance cost-effectively. So, what has changed – and can your operations take the strain?

First, we need to go back to 2004, when the National Association of Insurance Commissioners (NAIC) created the FE rule. Until this point, insurance companies had to file a large amount of detail on their owned investment vehicles with the NAIC’s Securities Valuation Office (SVO), which in turn rated the value and credit quality of the investments in a painstaking process.

Typically, however, these securities would also have been rated by at least one of three other nationally recognized statistical rating organizations (NRSROs). The FE rule came in to reduce all this arduous, often replicated effort – by letting insurers take the available NRSRO ratings for each security and simply assign an SVO equivalent. If three NRSROs had rated a security, the second-lowest rating would apply; if only two, then the lowest.

At the time, there were only three NRSROs. Today, there are nine, now known as credit rating providers (CRPs) – with a possible tenth to be named soon. What is more, as people have changed jobs or retired, and as new insurance companies have come online, the finer points of the FE rule have been forgotten or miscommunicated.

As a result, over the years, incorrect calculations have created a significant number of rating exceptions, representing $116 billion a year by 2015. Investigations by a dedicated NAIC working group found a key source of error to be “private letter” ratings of private placement securities. In these cases, insurers had paid a CRP to rate the security, but were also required by the CRP to sign a non-disclosure agreement.

Therefore, the SVO did not know that the rating existed and could not verify it. Many of the exceptions also had identifiers other than CUSIP – the only identifier used by the SVO – or had ratings taken from Bloomberg, which the SVO doesn’t recognize as a CRP.

After its detailed analysis, the working group made the following recommendations that have now – or soon will – come into effect:

  1. Securities that are private placements or have been rated or included in data feeds by a CRP but lack a valid identifier, should be classed “not rated” – therefore subjecting them to the highest risk-based capital factors.
  2. Use of ratings obtained from Bloomberg should be considered non-compliant.
  3. All pre-refunded securities should now be filed so the SVO can validate the pre-refunding agreement and the sufficiency of assets set aside to perform the obligation.
  4. Securities involving U.S. government guarantees should be subject to a policy-based filing exemption.
  5. The SVO should begin using International Securities Identification Numbers (ISINs) in its VISION system.
  6. Private letter ratings for securities issued before January 1, 2018, should be “grandfathered” into a new rating process, using an equivalent SVO rating and the suffix PLGI. For private placements issued after that date, the intention is that the CRPs that provide private ratings will supply them directly to the SVO.

In addition, the SVO has taken over the reporting and reviewing of rating exceptions from state examiners. Some companies have already begun receiving letters from the organization’s new quality assurance team, insisting they either justify or change reported ratings.

One thing that hasn’t changed is the requirement to use all available ratings to determine FE ratings. The only way that an insurer can be confident of considering all available ratings is to take feeds from all nine CRPs. That is an expensive undertaking, and only the largest carriers can afford to do so. The small to mid-sized companies, then, are compelled to use the equivalents that the SVO provides in VISION.

If your company has been calculating FE ratings correctly, or using the SVO’s ratings, congratulations! There is nothing for you to change. If not, though, you will want to take a hard look at your process and adapt accordingly.

FIS can help. Contact us at to find out how we can support your firm through changes to the FE rule.