Insurance regulators frustrated by the credit-rating agencies who gave safe ratings to dangerous securities are challenging the current rating system. From the Wall Street Journal:
The regulators' moves are at a preliminary stage, but could change how state regulators gauge the quality of the investments backing insurers' policies. Currently they use the major ratings firms recognized by the Securities and Exchange Commission.
Insurance regulators are considering whether to substitute analysis from other financial firms with expertise in valuing the securities, officials say. The effects of such a change could trickle throughout the world of bond investing, given insurers' outsize role in the bond markets.
"We just need to take stock of this reliance on a system that allows that kind of shock," in the form of swift and severe downgrades, "and frankly evaluate if there are other alternatives," said New York Insurance Department Deputy Superintendent Hampton Finer in an interview. Amid criticism of ratings agencies, he added, "we're under quite a bit of pressure to respond."
Insurers hold trillions of dollars in bonds in their portfolios and rely heavily on ratings to determine the safety of those bonds.