While the opinion insurers hold of rating agencies is generally positive, many feel rating agency standards have become increasingly stringent, says a new study by Swiss Re. In “Insurance Company Ratings”, Swiss Re notes that insurers see rating agencies as “reasonably focused, fair and balanced” but were concerned that through the 1990s ever more stringent standards have forced insures to hold excess capital to maintain their ratings. Figures from A.M. Best show that the number of p&c insurers rated “superior” has fallen from more than 30% in 1988 to under 10% by 2002. Similarly, on the life & health side, between 1991 and 2001, the number of insurers rated “superior” fell from just under 40% to just over 10%. Insurers also expressed concern over the potential conflict of interest inherent in rating agencies charging for ratings and for consulting services to those same clients. In doing so, they become both quasi-regulators and for-profit businesses. In the area of timeliness, rating agencies have made some headway through the use of quantitative barometers. And the importance of ratings has grown as regulators being to incorporate these into their rules. Ratings are also used as part of contracts, where a specific downgrade can allow one party to take protective action against the other. With the recent corporate scandals such as Enron, more focus has been paid to rating agencies, specifically by the U.S. Securities Exchange Commission, which is looking into the potential oversight of rating agencies. “In the coming months the SEC is likely to take steps to promote increased competition in the rating industry,” Swiss Re notes. The SEC is also interested in the quality of information flows and potential conflicts of interest. The study notes that four firms A.M. Best, Moody’s, Standard & Poor’s and Fitch comprise 98% of the industry revenues for ratings, and of these, A.M. Best is focused on the insurance industry. Insurers pay from US$5,000 to US$1 million or more per year to be rated interactively by these firms, on either or both of financial strength (ability to pay claims and obligations promptly) or debt related to a specific security issuance.