AM Best Report Outlines Rating Considerations for Captive Insurers

A new report from AM Best International, titled FAQ on Rating Captives and Other Alternative Risk Transfer Entities, outlines how the rating agency evaluates captive insurance companies and other alternative risk transfer (ART) entities, with particular attention to cell company structures. The November 12, 2026, report addresses key considerations under Best's Credit Rating Methodology, including balance sheet strength, operating performance, business profile, and enterprise risk management.

According to the report, AM Best categorizes ART entities into five broad groups: single-parent and pure captives, group captives, risk retention groups, self-insurance funds, and cell companies. Each structure has distinct ownership, regulatory, and risk-sharing characteristics.

The report identifies three types of cell companies. Incorporated cell companies consist of separate incorporated cells that may hold their own insurance licenses, issue policies, and transact with third parties. Unincorporated cell companies generally issue policies on behalf of individual cells that may not be separate legal entities. Mixed cell companies combine incorporated and unincorporated cells.

According to AM Best International, the rating process for cell companies requires comprehensive information because these structures may encompass multiple, complex, and specialized lines of business. Sponsors are expected to provide audited financial reports, key agreements, business plans, licenses, and insurance or reinsurance policies.

The report also identifies jurisdictional and regulatory considerations as part of the rating analysis. AM Best may conduct additional reviews involving regulatory authorities, third-party legal assessments, and external actuaries. The analysis may consider contractual arrangements, interactions among cells, loss and performance data, and applicable regulatory requirements.

For balance sheet strength, AM Best International said unincorporated cell companies are assessed using a weakest-link approach, meaning the company is viewed as only as strong as its weakest cell. Each cell must be adequately capitalized, with consideration given to whether losses could erode its own capital or that of the broader company. For incorporated cells, the assessment focuses on segregated funds, stress scenarios, financial flexibility, and access to additional funding.

According to the report, operating performance is considered a leading indicator of future balance sheet strength and long-term financial stability. The analysis considers the stability and sustainability of earnings, historical and projected premium adequacy, loss reserve development, and longer-term profitability. AM Best also recognizes that limited risk scope, relatively high net exposure, and operating volatility may be inherent characteristics of captive insurance arrangements.

The report states that captive insurers and other ART entities generally would not receive a business profile assessment higher than "Neutral." AM Best considers the relationship between the entity and its insureds, including customized coverage, claims and loss-control solutions, and the participation of owner-insured representatives on governing boards. The agency also expects objective strategic planning and forward-looking financial projections.

Enterprise risk management is another component of the analysis, according to AM Best International. For cell companies, the assessment considers structural arrangements, contractual relationships, asset and liability segregation, reputational risk, and fronting and reinsurance agreements. Unincorporated cell companies generally rely on the captive manager or sponsor for enterprise risk management, while incorporated and mixed cell companies are evaluated based on the risk profiles of their individual cells.

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