A leading credit ratings agency has pushed back against a recent academic study that questioned the reliability of private-credit ratings used by life insurers, arguing that the research overstates both the risks and the potential impact on the industry.

The response from Kroll Bond Rating Agency follows publication of a Columbia Business School working paper that found privately rated bonds were more likely to experience credit impairments than publicly rated bonds carrying the same rating grades.

The researchers estimated that United States life insurers would need to hold about $4.5 billion in additional capital if those ratings were aligned with the assets’ observed performance.

In a research note released this week, KBRA said the study raised “important questions” about the growth of private ratings in insurer portfolios but it quibbled with whether the impacts were as serious or far-reaching as the paper claimed.

“Our objective is not to argue that private ratings should be exempt from scrutiny,” KBRA said. “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.”

The agency said that the study relied on accounting impairment measures rather than traditional ratings-performance metrics such as defaults, rating transitions or expected-loss analyses. It also argued that the researchers inferred rating inflation rather than directly measuring it.

KBRA added that even if the study’s assumptions were correct, the estimated capital impact was relatively small compared to the size of the US life insurance sector.

“Even accepting those assumptions, the paper’s own illustrative exercise produces a modelled industry capital adjustment of approximately $4 billion,” the report said, describing the figure as modest relative to the size of the overall industry.

Private credit has become an increasingly important asset class for life re/insurers, including numerous groups operating in Bermuda. Many of them have invested in the $2 trillion direct lending market, which is fuelled by non-bank institutions and funds who lend to businesses.

Questions about how those assets are rated and how much capital insurers should hold continue, although experts have said some of the fears are overblown.

• See the full KBRA paper in Related Media

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KBRA response to Columbia University private-credit ratings paper