Insurance regulators to pay closer attention to residential mortgage loans

The National Association of Insurance Commissioners has "taken notice" of insurers' growth in residential mortgage loans and may give further scrutiny to the asset class, according to Wisconsin's state regulator.

"I anticipate that more attention will be given to this topic to ensure that broader disclosure, attributes, capital, etc. all continue to make sense from a regulatory standpoint, especially given the broader usage of residential mortgage loan classification beyond what was originally contemplated," Wisconsin Insurance Commissioner Nathan Houdek said during a webinar hosted by S&P Global Market Intelligence.

Houdek's comments came in reference to insurance companies holding residential mortgage loans indirectly through Delaware Statutory Trusts, legal entities that allow multiple investors to hold fractional, beneficial interests in real estate or other assets under Delaware law. Houdek, who also serves as chair of the NAIC's financial condition committee, said that there is a presentation on the topic set for the Invested Assets Task Force group at the NAIC's Spring National Meeting held in San Diego from March 22 to March 25. A decision on the "next steps" for potential action will be made after that presentation, he said.

'Informed reliance' on credit ratings

The NAIC in 2025 announced several changes updating how it will view and regulate insurers' investments, with one of the most significant being to restructure its working groups in task forces. The new commissioner-level Invested Assets Task Force is supported by three working groups: the Investment Analysis Working Group, the Securities Valuation Office and Structured Securities Working Group, and the Credit Rating Provider Working Group.

The NAIC is in the process of developing a Credit Rating Provider (CRP) Due Diligence Framework, which is intended to establish a process to support the regulatory group's reliance on translating credit ratings to NAIC designations. As of Jan. 1, the NAIC is able to challenge and override designations that stem from Nationally Recognized Statistical Rating Organization (NRSRO) ratings of filing-exempt securities.

"As a substantial user of the credit ratings provided by NRSROs, the NAIC really needs to assess the appropriateness of those ratings for our own regulatory purposes," Houdek said. "We often like to say that we're moving from blind reliance on CRP ratings to informed reliance."

The NAIC brought PwC in as an outside consultant on the CRP Due Diligence Framework. Houdek anticipates receiving an initial on its work after the spring national meeting and hopes to have a final draft by the end of the year.