The validity of credit rating agencies and their impact on an African reinsurer

Abstract

The purpose of this analysis is to determine whether the rating criteria used by the credit rating agencies is consistent for African-based reinsurers and non-African companies. A credit rating is an assessment of a large variety of information that needs to be known about the creditworthiness of the issuer or provider of financial instruments. The credit rating agencies thus contribute to solving principal-agent problems by assisting lenders in piercing the fog of asymmetric information that surrounds lending relationships and help borrowers emerge from that same fog (Fong, Hong, Kacperczyk, & Kubik, 2014). Credit rating agencies have been criticised for their role in the financial crisis of 2008 as they underestimated the credit risk associated with structured credit products. Yet, the financial crisis for emerging markets is a perennial one that they seemingly cannot recover from. Whilst the subject of poorly-rated reinsurance security is endemic to the emerging market, negligible research has been conducted to understand the problem or quantify its impact upon the reinsurance industry. This report is the first to focus on this specific problem in Africa and has managed to highlight arguments and themes that warrant further research and investigation in order to gain a deeper, more comprehensive understanding of the factors differentiating the African reinsurance sector and negatively impacting their competitiveness in their own market.