The self-description of our association says the following: “As a risk bearer and significant capital provider (with an investment portfolio of about EUR 1.7 trillion) private insurers also play a prominent role in investment, growth and employment in the German economy.” That brings us to the point: we, the insurers, view the business practices and market domination of the three major US rating agencies with concern. S&P, Moody’s and Fitch are in effect an oligopoly, with all the harm that entails for investors and capital market efficiency. Moreover, it's the consumers who ultimately pay for it.
European laws are increasingly requiring us to use ratings, in the context of Solvency II for example
Why is that? External credit information is a must for European insurers, fund managers and other financial market players such as banks, not least for regulatory reasons. As one of the largest groups of institutional investors in the European Union, insurers are naturally regular users of rating data for asset and risk management, compliance and regulatory reporting as well as for accounting purposes. European laws are increasingly requiring us to use ratings, with regard to Solvency II for example. As a result, our sector is de facto obliged to work with three companies that form a market-dominating oligopoly. While the areas of rating agencies that actually perform analyses are now subject to stringent regulation due to the 2008 financial market crisis, some of their other operational areas remain fully unregulated. One prominent example being the departments that sell rating data through licensing agreements to users worldwide, such as insurance companies.
It doesn't take an economics degree to understand what that means: these rating agencies regularly exploit their market power to enforce disproportionate fee increases.
As a business lobbyist of many years and with the deepest conviction, I regularly speak out against excessive regulation. The maxim is: “as much as necessary, as little as possible”. Regarding rating agencies I can only say: if the market situation calls for it, regulation is unavoidable and it should be comprehensive and airtight – there can be no loopholes. Together with the German Investment Funds Association BVI, we therefore call on the EU Commission to increase its regulation and be more stringent in its supervision of US rating agencies and their rating data pricing practices.
The European Securities and Markets Authority (ESMA) has already consulted the users of rating information and asked for their position. You can read about the position of the GDV here.