10 June 2015Bermuda analysis

Captives gain much from securing a rating: AM Best

A captive insurance company gains many advantages from gaining a rating said Alan Kandel, business development manager, AM Best.

Speaking at the Bermuda Captive Conference held in Bermuda this week (Monday June 8 to Wednesday June 10), Kandel said: “There are many reasons companies get their captives rated: it offers a validation of their operations, means enhanced transparency, allows for the increased involvement of brokers, can be used for benchmarking purposes, helps with capital raising, aids reinsurance negotiations and improves corporate governance.

Kandel noted that of the 200 captives rated by AM Best, some 37 percent are single parent entities and 34 percent are group captives.

The most common type of business covered by these rated captives is professional liability, which accounts for 30 percent, while property/casualty risks account for 18 percent and workers’ compensation 13 percent.

He also added that an investment grade rating can help an entity reduce fronting charges and fees and sometimes these can be removed completely.

Andy Hulme, vice president of underwriting and claims, JLT Insurance Management (Bermuda), backed this up. He admitted that it can seem counterintuitive for a captive simply managing the risks of its parent to require a rating but he said that this ignores the fact that captives have numerous stakeholders.

“No captive exists as just an island; they exist within a framework of other interested parties including peers, cedants, regulators and other parental divisions,” Hulme said.

“It offers validation on many fronts, proving that it is at an arm’s length from its parent and can stand on its own two feet. It also allows for costs to be reduced on fronting arrangements and the benchmarking against peers can be very useful.”

Giving credence to the perspective of the first two speakers was Percy Nunez, director, Lion Reinsurance Company, the captive owned by Grupo ASSA, a large Panamanian insurance group.

Lion Re has a financial strength rating of A- from AM Best, posted gross written premiums of $7.1 million in 2014 and a net income of $2.3 million.

Nunez said the company has the captive rated for many reasons. One is that a growing number of countries require any reinsurer operating there to be rated. Another is that it helps to have a central focus for exposure loss data as this helps the board make better decisions around risk management.

“It also allows us to maintain an international guideline for risk management on our reinsurance operations. Plus, having the captive based in a regulated environment such as Bermuda gives us comfort we are doing things well,” he said.