12 November 2013Analysis

AM Best: number of rated captives climbs despite soft market

According to Alan Kandel, business development manager at AM Best, challenges relating to pricing and availability of coverage in the commercial market have pushed more captives to seek a rating.

Kandel said: “Historically, captive activity both in formations and ratings has been more active in hardening markets. However, over the past three to five years, captive formations and rating activity has continued to grow year over year in spite of the soft market.”

He explained: “pricing and availability of coverage in the commercial market can be a challenge. This has led to utilisation of captives to write coverage either not available or priced at levels that are not cost effective. Another area that is contributing to captive rating growth is managing health care costs. This has started to lend itself to using a captive to manage the portion self-insured and also an increasing interest in stop loss policies.”

According to Kandel the disparity between the number of rated and unrated captives—only a minority of the estimated 6,000 global captives are rated—is down to the purpose for which those captives were established. He said: “the need for a rating isn’t always justified. Since there are generally no requirements for a captive to be rated and there is a fee for the analytical work, the majority of captives/RRGs do not need a rating to continue to support their organisations.”

Securely rated captives, however, may aid in negotiating terms and conditions with reinsurers. They can also allow third-party business to be written in a captive to diversify risk and can reduce business concern about paying claims. In addition, a secure rating plays a role in group captives by keeping current members happy and attracting new members.

Kandel said: “a secure rating can also allow a captive to write new lines of business either not available in the commercial market, too expensive or with limited capacity. A rating can provide validation of business operations and is important internally and to the market. Corporate governance is becoming a major driver for ratings, and there is growing interest by states and government bodies in entities getting rated.”