Rating agencies have their faults, but what's the alternative?

“Reinsurers need the rating agencies – otherwise they can’t do business,” muses one expert. “That’s why they’re not prepared to criticise them too publicly. I would say this illustrates the point that these guys have got too much power, and they’re not regulated or checked by anybody.”

Well, this month, we’ve taken an in-depth look at the rating agencies’ record, their relationship with the reinsurance industry, and that all-powerful hold they have on who does business with whom.

Many chief executives are swift to criticise the agencies in private, arguing that they have too much control and not enough independence, and that they often lack the basic skills needed to understand a reinsurer’s business model.

In public, with the ever-present spectre of a fatal downgrade, it’s a different story.

No one can deny that the agencies were embarrassed by the events of the financial crisis – and their credibility has been in question ever since. Coming up with a rating is an honesty game – the ratings are based on what reinsurers tell the agency, so small wonder it sometimes goes wrong.

But in the absence of a viable alternative, brokers and cedants need some way of judging their reinsurers’ financial stability – this system may be far from perfect, but what’s the alternative?

With a bit of luck, Solvency II and other improved forms of regulation will help; it will sift out the weaker companies from the system, meaning there could be less reliance on the agencies’ views.

In the meantime, though, they continue to hold sway – and while chief executives may mutter in corners, don’t expect to hear them speak out any time soon.

Ellen Bennett is editor-in-chief of Global Reinsurance

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