Rating process

Rating process
See also
Design risk assessment Conditions of decision-making Total risk Contribution analysis Opportunity risk Collateral information Risk evaluation Risk analysis in project Importance of decision making

Rating process term stands for a technique which put under consideration factors such as presented risk, administrative constraints, benefits or demographic features. Usually, rating process is only a part of action which is focused on conducting deep analysis to make a relevant and as rational as possible decision based on some reasonable argumentation. In most cases rating process helps in right establishment of the premiums rate in performance rating or credit worthiness.

Using rating process in practise

Fig. 1 Performance rating - Component model (source: Frank J. Landy and James L. Farr Psychological Bulletin, 87(1) (1980): 74.)

On the example of the performance rating component model (Fig. 1), rating process is a part of whole rating system. It may include the following elements:

• a. the roles of person responsible for observing and evaluating worker's performance (the rater) and worker under observation (ratee),
• b. the method of realizing rating,
• c. the situation and environment in which rating makes place such as organization structure, purpose of evaluation and motivation,
• d. the rating process, currently discussed element, used to analysis ratee performance and compare to concept of standard action taking into account specific features or administrative constraints or individual strategies of rater.
• e. the rating results such as planned actions or feedback about observed performance.

Using rating process in a specific situation can not only give deeper feedback but also might protect organization from wrong decision and minimize risk of making decisions. In financial area of creditworthiness right rating process is crucial. Basic element of consideration include quantitative variables, for example cash flow establishment of potential obligor and his liquidity or qualitative variables such as competitive advantages or what is more important, competitive disadvantages. However, scale of importance may be lower than financial decisions but this action is still valuable. Rating process also takes place in a bunch of method in assessment center for generating ratings. It is all about gaining knowledge, which might be useful and provide development.

Examples of Rating process

• Risk Rating Process: This is a process by which the risk associated with a particular project or investment is assessed. This is typically done by considering various factors such as the project’s expected return, the cost of capital, the volatility of the market, the amount of leverage involved, and the level of risk tolerance of the investor.
• Performance Rating Process: This is a process used to evaluate the performance of an individual or organization. Factors such as productivity, efficiency, innovation, customer satisfaction, and quality of work are taken into account to determine the overall performance rating.
• Credit Rating Process: This is a process used to assess the creditworthiness of an individual or entity. Factors such as repayment history, credit utilization ratio, payment history, and length of credit history are taken into account to arrive at a rating.
• Demographic Rating Process: This is a process used to evaluate the characteristics of a population. Demographic factors such as age, ethnicity, gender, income, and educational level are taken into account to arrive at a rating.

Advantages of Rating process

Rating processes have many advantages, including:

• Improved accuracy and precision in decision making. It helps to eliminate any biases or inaccuracies that could arise from the manual estimation of different factors. Rating processes also provide more objective assessments of risk, allowing for a more accurate and reliable decision-making process.
• Increased efficiency. By automating the rating process, organizations can save time and reduce costs. Automation also helps to reduce the time to make decisions, as the rating process can quickly evaluate multiple factors and generate the most optimal solution.
• Increased transparency. Rating processes provide a more transparent assessment of risk. By providing a detailed report of the factors that were taken into consideration, organizations are better able to understand the assessment process and explain their decisions to stakeholders.
• Enhanced customer experience. Rating processes can provide customers with more detailed information about the products and services they are considering. By providing customers with a clearer understanding of their risk exposure, they can make more informed decisions.

Limitations of Rating process

The rating process has several limitations, which can lead to incorrect conclusions or decisions:

• Data Availability: The accuracy of the results generated by the rating process is subject to the availability of quality data. If the data is incomplete, inaccurate or of low quality, the conclusions may be wrong.
• Subjectivity: The rating process involves subjective judgement and interpretation which can lead to biased results.
• Cost Effectiveness: The rating process can be expensive and time consuming, which may not be feasible for some organizations.
• Complexity: The rating process involves complex calculations and algorithms that may require specialized skills to interpret and understand the results.
• Standardization: The rating process may be difficult to standardize across different organizations, as it is highly subjective and requires specialized skills.
• Timeliness: The rating process must be done in a timely manner in order to be effective. If the rating process is not done regularly, the results may become outdated.

Other approaches related to Rating process

• One of the approaches related to Rating process is the Risk-Based Pricing (RBP) approach. This approach considers the risk associated with a particular loan or credit, and then takes into account the associated costs and benefits. It is used to determine the price of a loan or credit product.
• Another approach is the Benefit/Cost Analysis (BCA). This approach considers the costs associated with a particular loan or credit, and compares them to the expected benefits. It is used to assess the feasibility of a loan or credit product.
• The third approach is the Demographic Analysis (DA). This approach considers the demographic characteristics of a particular loan or credit, and then evaluates the expected benefits and costs. It is used to assess the eligibility of a loan or credit product.

In summary, the rating process is a technique which considers factors such as presented risk, administrative constraints, benefits or demographic features in order to make rational decisions about pricing, feasibility and eligibility for a loan or credit product. Other approaches related to the rating process include Risk-Based Pricing (RBP), Benefit/Cost Analysis (BCA) and Demographic Analysis (DA).

References

• Huhta, A., Alanen, R., Tarnanen, M., Martin, M., & Hirvelä, T. (2014). Assessing learners’ writing skills in a SLA study: Validating the rating process across tasks, scales and languages.. "Language Testing", 31(3), 307-328.
• Landy, F. J., & Farr, J. L. (1980). Performance rating. “Psychological bulletin”, 87(1), 72.
• Moses, J. L., & Byham, W. C. (Eds.). (2013)., Applying the Assessment Center Method, Elsevier, Amsterdam, s. 3
• Robie, C., Osburn, H. G., Morris, M. A., Etchegaray, J. M., & Adams, K. A. (2000). Effects of the rating process on the construct validity of assessment center dimension evaluations.. “Human Performance”, 13(4), 355-370.
• Stefanescu, C., Tunaru, R., & Turnbull, S. (2009). The credit rating process and estimation of transition probabilities: A Bayesian approach.. “Journal of Empirical Finance”, 16(2), 216-234.

Author: Krystian Prorok