Sept. 9 (Bloomberg) -- State regulators scheduled a hearing to review their reliance on ratings firms in grading insurers’ financial strength and whether changes are needed after the plunge of top-ranked bonds exposed flaws in credit scores.

Representatives of ratings firms, insurance companies and pension funds will be invited to testify at the Sept. 24 hearing, acting New York Insurance Superintendent James Wrynn said today in a statement. Wrynn and Michael McRaith of Illinois lead a group appointed by the National Association of Insurance Commissioners to evaluate watchdogs’ reliance on the firms.

Regulators use ratings from firms including Standard & Poor’s and Moody’s Investors Service as they monitor insurers’ portfolios to make sure carriers have enough funds to pay claims on policies ranging from mortgage guarantees to earthquake protection. U.S. insurance companies hold almost $3 trillion in rated bonds including corporate debt and mortgage-linked securities, Wrynn said in the statement.

“The hearing will examine the role of these credit rating agencies in the insurance regulatory system and what changes may be needed in light of the financial crisis,” Wrynn’s office said in the statement. After the hearing, a committee will present “findings and any recommendations for corrective action available to the NAIC.”

Regulators will consider approaching companies beyond S&P, Moody’s, Fitch and Dominion Bond Rating Service Ltd. to analyze securities, said Hampton Finer, deputy superintendent and chief economist at the New York Insurance Department.

Self Defense

All four ratings firms are invited to attend, he said. DBRS is aware of the session, and is cooperating with regulators, the Toronto-based company said in a statement. Michael Adler, a spokesman for Moody’s, and Edward Sweeney of S&P had no comment. Fitch’s Kevin Duignan said the firm will participate at the hearing. Fitch is a unit of Paris-based Fimalac SA, S&P is a unit of McGraw-Hill Cos. and Moody’s is a unit of Moody’s Corp.

“This really is the opportunity for the rating agencies to defend themselves and defend the role they play in our supervisory framework,” Finer said in an interview.

Ratings on commercial mortgage-backed securities and other structured notes are used by regulators when calculating the amount of capital insurers need to protect against investment losses. Downgrades to CMBS and residential mortgage-backed securities increased capital requirements at a time when insurer results were pressured by investment declines.

Regulators, consumer representatives, academics and industry experts will also be invited to attend the hearing, Wrynn’s office said in the statement. The session will be held at National Harbor in Maryland.

Subprime Mortgages

Moody’s and S&P, both based in New York, have been criticized by investors and lawmakers including Senate Banking Committee Chairman Christopher Dodd, who has said the companies wrongly assigned top credit rankings to subprime-mortgage bonds just before that market collapsed in 2007.

A federal judge this month refused to dismiss a lawsuit against the firms over their ratings. U.S. District Judge Shira Scheindlin in New York rejected the firms’ arguments that investors can’t sue over deceptive ratings of private-placement notes because those opinions are protected by free-speech rights.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net

Last Updated: September 9, 2009 17:45 EDT