AM Best Issues Revised Criteria for Rating Captives and Other ART Entities

AM Best has released its revised criteria procedure, "Rating Captives and Other Alternative Risk Transfer Entities" (formerly titled "Alternative Risk Transfer"), which is effective immediately. 

According to AM Best, the criteria apply the organization's general rating framework—evaluating balance sheet strength, operating performance, business profile, and enterprise risk management (ERM)—with adjustments for the unique characteristics of captive insurance companies. The revisions establish a framework for assigning issuer credit ratings and financial strength ratings to individual incorporated cell entities, while reaffirming that the "weakest link" approach remains in place for unincorporated cell companies. 

Per the report, the methodology recognizes that captives often operate with limited business diversification and a high reliance on parental support. AM Best noted that explicit guarantees, capital contributions, and liquidity access from parent organizations are central factors in the balance sheet strength analysis. Letters of credit are acceptable under the updated procedure, provided they meet detailed conditions outlined in the report. 

According to AM Best, the assessment of operating performance incorporates the captive's alignment with parent risk management objectives. Many captives may not target traditional profit metrics; instead, their value is measured by risk financing efficiency, cost savings, and claims management effectiveness. 

Business profile and ERM remain critical building blocks. Per the report, AM Best evaluates a captive's governance practices, underwriting controls, and the strength of its regulatory environment. For cell structures, operational and legal foundations must meet baseline requirements in order for the entity to be considered for a rating. 

The agency said it initiated a call for comment on December 2, 2024, which closed on February 20, 2025. No comments were received from market participants, and therefore, no changes were made to the final version of the criteria procedure. AM Best confirmed that the revisions will not result in any changes to currently published Best's Credit Ratings. 

Copyright © 2025 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED