5th August 2020

Insurance Europe publishes response to a call for evidence by the European Securities and Markets Authority (ESMA) on credit rating information and data

Insurance Europe has published its response to a call for evidence by the European Securities and Markets Authority (ESMA) on credit rating information and data.
Credit ratings are necessary to meet requirements under the Solvency II framework and to report to public authorities. They are also a central and integral part of an insurer’s approach towards risk management, its investment portfolios and strategy. As such, credit ratings are a vital component in enabling insurers to carry out their core business and activities. Given their large and diversified investment portfolios, insurers are therefore dependent on credit rating agencies(CRAs).
In several market segments, instruments are almost exclusively rated by three main US-based CRAs in what could be considered as an oligopolistic market structure. It would therefore be challenging for insurers to replicate CRA rating methodologies and research in a cost-effective way. This market concentration comes to the detriment of institutional investors who need CRA licencing for risk management and regulatory reasons.
To make the credit ratings published on CRA websites more useful and easier to access, the industry has the following suggestions:
-Firstly, CRA websites should state clearly that it is possible to use ratings by CRAs for internal and regulatory purposes without a license agreement. Intellectual property laws are an obstacle to this. In addition, there have been significant increases in the cost of these licences since the implementation of Solvency II.
-Secondly, CRA websites should allow for export options with an automated and free-of-charge provision of rating data in a structured format. Process optimisation features are especially needed and valuable. For this reason, insurers rely on additional tools: eg a Bloomberg Data License.
-Thirdly, it would be helpful for CRAs to publish clear and transparent descriptions of their services and the associated costs. There is currently a lack of commercial transparency surrounding the licensing process.
To improve the European Rating Platform (ERP), the industry notes that:
-Third-party data feed providers would use ERP information if it were free and appropriate for use as a primary source of rating information. This is only possible if there is legal certainty that the ratings are freely available for internal and regulatory purposes, without a license agreement.
-Specific improvements are needed to make rating information retrievable in a structured automated manner: eg the automated upload of a portfolio of relevant IDs to obtain the relevant data, more frequent and timely updates, flexibility in time periods for the ratings, improved traceability of data, etc.

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