The National Association of Insurance Commissioners (NAIC) on Thursday approved a proposal to establish a new model for determining ratings of residential mortgage-backed securities (RMBS). The new model will establish ratings designations for approximately 18,000 RMBS owned by US insurers by the end of 2009. It will by extension help to determine the risk-based capital requirements of these RMBS. “Compared to the rest of financial services, the insurance industry has weathered the impact of the credit crisis extremely well,” said NAIC president and New Hampshire Insurance Commissioner Roger Sevigny. “However, if these last two years have taught us anything, it is that we can never have too many tools with which to measure and improve our view of our industry and the effect of these complex securities.” NAIC’s support of the proposal indicates declining confidence in RMBS ratings produced by nationally recognized statistical ratings organizations (NRSROs), according to a NAIC statement. These ratings are commonly used by regulators to score securities for solvency regulation — a problem, according to NAIC, since problematic MBS issued in 2005 did not begin displaying issues until late 2007. NAIC indicated current ratings systems are seen by some regulators as insufficient in their treatment of RMBS losses in terms of determining risk-based capital. The approval of the proposal this week should establish a set of NAIC designations insurers can use to calculate the risk-based capital (RBC) charges for the specific RMBS they own. Life insurers, for example, invest mostly in triple-A-rated bonds, according to Whit Cornman, spokesperson for the American Council of Life Insurers (ACLI), the group that offered the proposal approved by the NAIC this week. “However, the rating agency models require a downgrade to single B or below if any loss is projected to occur at any time during the life of the security, regardless of the severity of the loss,” Cornman said in a statement Friday. “The new methodology will align better with the NAIC’s model for determining RBC, which accounts for probability as well as severity of loss.” The news of NAIC’s new methodology is significant, considering the different RMBS landscape seen in Europe. RMBS deals in Europe are beginning to move forward without any formal rating, market sources tell HousingWire. The sources expressed some hesitance on how the deals will be tranched, as no deal has yet come to market with this design. Write to Diana Golobay.