I've been off a while so will respond to (I hope) all of your points at once.
Actually, you replied with how things are done in aikido --- which was something I was aware of.
While I certainly agree that a grading doesn't come close to the stress of actual randori or combat, for many organisations it's the closest they get.
If the most stressful thing a student does doesn't come close to combat, isn't it a dis-service to make any claims towards self-defense?
Many times it's <testing> infront of a sensei and senior students they don't regularly train with.
A statement you clarifed by writing that not everyone makes it to seminars ergo, they don't know everyone --- which is exactly what Opher wrote. I reply to you as I did to him:
Go to a few seminars and you'll start to see the same people. Even the situation you mention is the same way. The people are familiar, and are trained in the same methods with the same testing criteria ---- they are not greatly dissimilar. And the key points, they are not completely uncooperative ukes, and there is a great deal of "known" structure for much of the test --- ie the attack is specified and the response is specified.
My point is simply that given that many many dojos don't spar, grading is all you have left to observe technique in an environment that is more stressful than day to day training.
Ok. I submit that grading is highly subjective and not particularly dissimilar from regular training. I see no reason why rank cannot be awarded without kyu/dan exams.