S&P’s cites benefits of rating insurance captives

Setting up captive insurance companies, if done properly, can be an effective application of enterprise risk management, according to Standard & Poor’s.
In an Oct.2 press release announcing its participation in the September 2006 Rims Canada conference in Calgary, Standard & Poor’s reiterated some of the benefits of obtaining financial strength ratings for captive insurance companies.
“Although setting up a captive introduces the risk that a company might not appropriately address its risk exposures, a well-run captive, in addition to successfully addressing and mitigating risk exposures, can be an effective application of enterprise risk management,” S&P’s director of financial service ratings Steven Ader said. “Specifically, a well-conceived and appropriately run captive materially reduces the volatility of insurance costs and in some cases may be the only effective way to access insurance protection to address exposures.”
Ader noted one advantage of obtaining a rating for a captive is that the detailed claims history captured by the captive can provide the sponsoring parent company valuable feedback. Such feedback, for example, would enable the parent company to implement risk mitigation initiatives, resulting in cost savings and reduced volatility.
“Material advantages range from a heightened assurance that the captive is appropriately managing the insurance risks of the organization, to the acceptance of the captive by business partners and regulators,” Ader said. “While unrated captives sometimes address the acceptance issues by posting collateral, a strong Standard & Poor’s-rated captive could leverage the rating, thereby avoiding the transaction costs of addressing client and regulatory concerns, and, in many cases, the material costs of posting collateral.”
The panel stressed the importance of enterprise risk management in Standard & Poor’s rating analysis. “Although enterprise risk management has always been integral to our rating analysis, effective October 2005, it became a separate and distinct rating factor that will be evaluated and disclosed in our published ratings for insurance and reinsurance companies,” Ader said.