What is a Rating Bureau?

One of the factors to be considered before making an investment is the credit rating of the company. This is a designation intended to predict the creditworthiness of a business. Ratings are also used to determine personal, business, and workman’s compensation insurance rates. A rating bureau is an independent or governmental agency that assigns ratings to individuals, businesses and financial instruments.

A credit rating bureau may operate at both the national and international level. Consumer credit reporting agencies, also called credit bureaus, assign ratings to individuals. These are independent entities, though they must comply with applicable laws regarding fair and accurate reporting and consumer confidentiality. The credit scores are generally based upon a person’s debt-to-income ratio, payment history, and the amount of credit available compared to total debt.

Rating bureaus are used world-wide to assess the creditworthiness of a business or government entity that issues stock, debt instruments or other securities. One of the concerns expressed by both national and international regulators is that the rating bureau is paid by the company that is seeking the rating. Traditionally, these agencies have set voluntary standards to try to achieve uniformity and fairness in their reporting. In the United States, such agencies must comply with applicable Security and Exchange Commission (SEC) regulations. The European Union (EU) has passed legislation requiring any rating bureau operating within the EU to register and comply with EU regulations.

As economic interests have become more global, several international rating bureaus have been created. Standard and Poor’s is one of the more recognizable international agencies. Another is Fitch Ratings, which has headquarters in New York City and London. The Association of Credit Rating Agencies in Asia was established to promote common practices and standards among rating bureaus throughout that region.

Insurance companies also use a rating bureau to set rates for auto, property, life, and business insurance. These companies pool claim information to obtain a broader statistical base from which to derive accurate insurance rates. While insurance companies usually adhere to the recommended rates, they can deviate from those if they choose. Some regions do require prior approval from the agency or a government overseer prior to granting a deviation. In some localities, rating bureaus have been established by government entities to oversee insurance rating agencies and ensure legal compliance and fairness.

Workman’s compensation, called Work Cover in Australia, is a program mandated in Europe, Canada, Australia, the United States, and other regions. Employers purchase these policies to cover medical costs and lost wages for employees who receive work-related injuries. A compensation insurance rating bureau determines the rates a company is charged for this type of insurance. One of the factors used to determine the cost is the frequency and severity of injuries that tend to occur in that particular industry. Since workman’s compensation pays a percentage of wages to an injured worker, the rates are also based upon the pay scale of the employees.

A rating bureau provides a valuable service to insurance companies, investors and lenders. While no one can be expected to predict future events, these agencies have access to financial data the general public cannot see. Regional oversight and requirements for such agencies may differ, so it is a good ideal to investigate the rating bureau making the assessment, as well as the credit rating of a potential investment.