KBRA releases commentary following the recent publication of the Columbia Business School’s Rating Without Market Discipline paper, which raises important questions regarding the growth of private ratings in U.S. life insurer portfolios and the interaction between ratings and regulatory capital. The paper concludes that privately rated bonds understate credit risk, experience higher subsequent impairment rates, and contribute to lower required capital than comparable publicly rated bonds.

This KBRA research reviews the paper’s methodology and its interpretation of the evidence. Our objective is not to argue that private ratings should be exempt from scrutiny. Rather, it is to help fixed income investors evaluate whether the evidence presented in the paper supports the breadth of its conclusions—which, we believe, they do not. Put differently, the paper’s rhetorical emphasis is on systemic risk, policyholder welfare, widespread rating inflation, and the absence of market discipline, while its principal quantitative estimate is a hypothetical modeled capital adjustment that is insignificant relative to the financial resources of the industry.

Key Takeaways

• Even if one accepts the entirety of the paper’s analytical assumptions and inferential steps as valid, the authors’ own illustrative capital exercise implies approximately $4 billion of additional required capital for the entire U.S. life insurance industry.
• Based on NAIC’s 2024 Life RBC Statistics, that amount represents roughly 0.5% of industry total adjusted capital (TAC), approximately 0.6% of industry surplus, and less than 0.1% of invested assets. In other words, a small pro forma impact on the industry’s risk-based capital ratio (RBC) of approximately 38 RBC points (830% versus 868%).
• That conclusion is considerably narrower and economically more modest than the impression conveyed by the paper’s title, abstract, and concluding discussion.

Click here to view the report.

Recent Publications

• Private Credit: A More Balanced Review of the NAIC PLR Review Process for Insurance Balance Sheets
• KBRA Global Rating Stability and Transition Study: 2011-2025
• Unpublished Ratings: Same Standards, Different Distribution

About KBRA

KBRA, one of the major credit rating agencies, is registered in the U.S., EU, and the UK. KBRA is recognized as a Qualified Rating Agency in Taiwan, and is also a Designated Rating Organization for structured finance ratings in Canada. As a full-service credit rating agency, investors can use KBRA ratings for regulatory capital purposes in multiple jurisdictions.

Doc ID: 1015439

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