Credit rating bureaus assign ratings to individuals, companies, and financial instruments to predict creditworthiness. They are used for insurance rates and assessing the creditworthiness of businesses and governments. International rating bureaus exist, and insurance companies and workman’s compensation schemes also use assessment bureaus. Regional oversight and compliance vary, so it’s important to investigate the rating bureau and credit rating before investing.
One of the factors to consider 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 workers’ compensation insurance rates. A rating bureau is an independent or governmental agency that assigns ratings to individuals, companies and financial instruments.
A credit rating bureau can operate both nationally and internationally. Consumer credit reporting agencies, also called credit bureaus, assign credit ratings to people. These are independent entities, but must comply with applicable laws regarding fair and accurate reporting and consumer confidentiality. Credit scores are usually based on a person’s debt-to-income ratio, payment history, and the amount of credit available versus total debt.
Rating agencies are used around the world to assess the creditworthiness of a business or government agency that issues shares, debt instruments or other securities. One concern expressed by both national and international regulators is that the rating bureau is paid by the company seeking the rating. Traditionally, these agencies have established 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 credit rating bureau operating within the EU to register and comply with EU regulations.
As business interests have become more global, several international rating bureaus have been created. Standard and Poor’s is one of the most recognizable international agencies. Another is Fitch Ratings, which has offices in New York City and London. The Association of Credit Rating Agencies in Asia was established to promote common practices and standards among credit rating agencies across the region.
Insurance companies also use an assessment bureau to set rates for auto, property, life, and business insurance. These companies collect claims information to obtain a broader statistical basis from which to derive accurate insurance rates. While insurance companies usually stick to the recommended rates, they can deviate from those if they choose. Some regions require prior approval from the agency or a government supervisor before allowing a detour. In some localities, rating agencies have been set up by government bodies to oversee insurance rating agencies and ensure compliance and legal fairness.
Workman’s compensation, called Work Cover in Australia, is a compulsory scheme in Europe, Canada, Australia, the United States and other regions. Employers purchase these policies to cover medical expenses and loss of wages for employees who are injured on the job. A compensation insurance rating bureau determines the rates charged to a company for this type of insurance. One of the factors used to determine cost is the frequency and severity of injuries that tend to occur in that particular industry. Because Worker’s Compensation pays a percentage of the wages to an injured worker, the rates are also based on the employee pay scale.
A rating bureau provides a valuable service to insurance companies, investors and lenders. While no one can predict future events, these agencies have access to financial data that the general public cannot see. Regional oversight and requirements for such agencies may differ, so it’s a good idea to investigate the rating bureau carrying out the assessment, as well as the credit rating of a potential investment.
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