CICA: CAPTIVE RATINGS TOUTED BY BEST

TUCSON, Ariz.-Obtaining ratings on claims-paying ability would significantly help captive insurance company owners in running captives efficiently, a rating agency official says.

Among other things, a rating would both improve captives' access to reinsurance and banking markets and suppress an over-stimulated appetite they might develop for third-party business if Congress enacts new captive premium tax-deductibility legislation, said John Andre, an assistant vp with insurer rating agency A.M. Best Co. of Oldwick, N.J.

In light of the middle market's growing interest in alternative risk financing, Best last year began to research and rate alternative risk-transfer mechanisms, including both single-parent and group captives, risk retention groups and pools. Best plans to expand that effort by rating even more alternative arrangements this year. As with the standard insurers Best rates, the alternative market ratings would be voluntary.

Standard & Poor's Corp. already rates captives, but it is looking at them as an increasingly "interesting market opportunity" as well, said Alan M. Levin, managing director of S&P Rating Services in New York.

Best's effort is a "credit to the alternative risk-financing market industry," Mr. Andre claimed. It underscores Best's belief that captives and other alternative arrangements will continue to grow, despite the enduring softness of the property/casualty market, he told attendees earlier this month at the 24th Annual Captive Insurance Cos. Assn. conference in Tucson, Ariz. Indeed, Best may publish separate rating guides on captives and other arrangements, he said.

Of the approximately 650 U.S.-domiciled captives, Best rates about 100, or 15%, of them.

Mr. Andre said captives that obtain a Best rating likely will find it will:

Improve their access to reinsurance markets. "Our feeling is that a rating on your captive's credibility helps in this area," he said.

Strengthen a captive's credibility with banks.

Doubly help captives if Congress enacts a Clinton administration proposal that would force captives to make 50% of their business unaffiliated-up from a 30% standard set by several courts-before their parents could take a tax deduction for the premiums they pay their captives.

A rating would help captives' marketing efforts in courting additional third-party business, Mr. Andre said.

Additionally, in a paper released last week, Mr. Andre said a rating would help a captive prevent itself from becoming overly aggressive in chasing new business, which could result in financial instability.

Mr. Andre noted that Best's rating appeal process means captive owners do not have to silently accept a captive rating with which they do not agree. The exception may occur in a catastrophic situation, when Best would need to act quickly in reassessing a captive's rating, he said.

In a question-and-answer session, an attendee reminded Mr. Andre about a couple of insurers that carried A ratings from Best at the time they became insolvent.

He agreed that those cases "left Best with egg on our face." But, Best since then has increased its meetings with insurer company managers and has beefed up its own staff, he said.

Among the captives and risk retention groups Best currently rates, the distribution of those with secure and vulnerable ratings surprisingly is comparable to the standard insurance market's, he noted. Some 74% of the alternative risk-financing arrangements carry secure ratings ranging from A++ to B+, compared with the 66% of standard market companies that carry secure ratings.

As part of its increased interest in rating captives, S&P is researching how it might modify its financial reports on the facilities, Mr. Levin said. He expects the modified reports would be attractive to risk managers involved with group captives. They tend to have a weaker grasp of their facilities' financial soundness than do risk managers involved with single-parent captives, he said.