KBRA publishes captive insurer methodology


Kroll Bond Rating Agency (KBRA) has published its global captive insurer rating methodology.

The methodology describes the major quantitative and qualitative factors KBRA considers when assessing the financial strength of captive insurers. It defines a captive insurer as an entity whose primary business is to accept the underwriting risk of its owner(s) and that is licensed and regulated under its domiciliary jurisdiction’s captive legislation.

KBRA stated that its general approach to analysing captive insurers includes a comprehensive evaluation of key quantitative measures, including stress testing, as well as qualitative elements encompassing three rating determinants: balance sheet management, operating fundamentals, and captive profile & risk management. KBRA will typically seek to engage in a dialogue with management to enhance its understanding of the qualitative determinants.

In Qualitative Rating Determinant 1, KBRA examines the captive insurer’s approach to managing its balance sheet – the starting point of which is capital. Captive legislation specifies the minimum capital required and the allowable form(s) for that capital. Captive regulators may require amounts in excess of the minimum capital depending on the specific risks assumed by the captive. KBRA will use the regulatory requirements as a foundation in assessing a company’s capital adequacy and give credit, as appropriate, to forms of capital not eligible for equity treatment under accounting standards.

In Determinant 2, KBRA reviews the organisation’s operating fundamentals, including historical pre- and post-dividend earnings trends, various profitability ratios, and pro forma earnings for expected future scenarios (e.g., coverage or business expansion). KBRA’s analysis is intended to be forward looking, and therefore is likely to take into account projections and estimates, as appropriate.

In Determinant 3, KBRA considers the captive’s domicile, the effectiveness of its risk management framework as well as the owner(s) overall involvement with, and strategic vision for, the captive.

Additionally, KBRA said that it will formally gauge the ability and willingness of the owner(s) to financially support the captive when needed, especially in its early years of operation. For single parent captives KBRA will assess the credit quality of the parent company utilising its general corporate rating methodology.

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Captive International