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July-September 2006 Pulse Survey Analysis:
Getting Your Captive Rated

 In partnership with captive.com, Towers Watson conducted this pulse survey to take a look at the issues involved in reinsuring your captive.

This analysis was written by analysts at Towers Watson.

The July Pulse Survey asked questions about having a captive rated by an outside rating agency. The survey elicited 43 responses, with 26 being from single-parent captives and 17 being from group captives.

Towers Watson asked whether or not captive owners had considered having their captives rated. Of the 37 respondents to this question, most (43.2%) said no. Another 32.4% have considered it, but haven’t explored it further. Another 13.5% have considered it and have done some in-depth study as to its value. Finally, 10% have already had their captive rated.

Of the 20 respondents to the next question about which rating service they would use, most (55%) would use A.M. Best, while 15% would use S&P and another 25% are not sure who they would use. One response said they would also consider Moody’s. Analysis: Towers Watson was not surprised by these results, given A.M. Best’s reputation as the primary rating agency for insurers, and its greater visibility at captive conferences and in the press. Nevertheless, S&P is frequently used because, outside of the insurance industry, S&P is more well-known and, depending on the reason for the rating, there are instances when using S&P is more in line with the captive’s and its parent’s needs. This was discussed in the Captive Insurance Company Reports article in July 2006, Case Study: Obtaining an S&P Captive Rating. The Moody’s response is a bit of a surprise, given it is primarily a credit agency, not an insurer rating service. Nevertheless, we do believe, when tracking financial strength of insurers in general, that Moody’s is also an excellent resource.

Why would someone want to have their captive rated? The majority (52.6%) of the 19 respondents to this question wanted help with reinsurance. Another 47.4% wanted help with fronting issues. A smaller group of 26.2% wanted to write third-party coverages, and just 21.1% felt they needed to assuage executive management. Three additional comments from respondents indicated it would be valuable to obtain market approval, to satisfy vendors who require rated paper, and for securitization. (Note: Multiple answers were acceptable.) Analysis: Again, these are in line with expectations. Nevertheless, another reason many captive owners might want to have their captives rated has to do with assisting in setting a financial strategy and determining a better capital management structure, including forecasting capital direction. This approach is more in line with using the rating process as a tool for more effective capital management, as opposed to reacting to insurance market conditions.

Why would someone not want to have their captive rated? A sizable majority (61.5%) of the 13 respondents did not believe it was necessary or of significant value. Another 38.5% felt there might be negative ramifications if the rating is either poor or subsequently downgraded. Another 15.2% felt it was too expensive. (Again, multiple answers were acceptable.) Analysis: Good concerns, but from what we understand, a captive owner can go through most of the rating process without actually having the results published. This allows the captive owner to take advantage of the process without having anything made public. Of course, this needs to be arranged carefully to make sure the process does not go too far beyond the point of no return, or that point in time where the rating agency has to make the results public.

 

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