The NAIC’s Valuation of Securities (VOS) Task Force decided it was good to hope for the best but prepare for the worst when it voted today 11-2, with abstentions to adopt a controversial proposal that will likely result in life insurances having to increase their risk-based capital for their mortgage backed securities.
The “most conservative” housing price projection is a further 30 percent decline from peak levels, translating to a 43 percent decline in current home prices. When benchmarked to the 103 Wall Street housing economist models, NAIC’s most conservative housing price decline is six times worse than the average of the five most pessimistic housing economists. The “conservative” scenario, even if unchanged from previous years, is still a depression-like scenario where nominal home prices do not change for 10 years and inflation-adjusted prices would likely be substantially lower, a cadre of life insurers told the VOS Task Force.
“As the housing market recovers and delinquency numbers improve, we would expect a lower capital charge for this segment of investments rather than a higher one,” stated the American Council of Life Insurers in a letter to Kevin Fry, chair of the NAIC VOS Task Force Oct. 23.