How to use credit rating agencies to enhance value for your captive

From stronger negotiations with fronting carriers to identifying ways to improve your market position, captives engaging credit rating agencies can expect a range of benefits. In this insight, based on our recent Captive Owners' Forum, we cover:

• How credit rating agencies offer captives competitive advantage
• When and how to consider deploying credit rating agencies for your captive
• The role of credit rating agencies in market transactions with captives

How credit rating agencies offer captives competitive advantage

Credit rating agencies play a pivotal role in the captives market by providing an independent assessment of a captive’s financial strength. These agencies focus on the likelihood of the captive defaulting, which is crucial for stakeholders relying on your captive’s financial stability. Prominent credit rating agencies in the insurance industry include Fitch Ratings, AM Best, Moody’s and Standard & Poor's. Each of these agencies has its own rating scale, but all serve the same fundamental purpose: to evaluate the financial health and creditworthiness of captives.

When you engage with a credit rating agency, you benefit from its global reach and expertise in underwriting activities. They conduct thorough financial testing and assessments, both during the initial engagement and through ongoing annual reviews. This continuous monitoring ensures your captive remains in good standing and can meet its financial obligations.

Using credit rating agencies effectively can help you take greater control of the total cost of risk associated with your captive in a range of ways, including:

• Benchmarking – Getting comparative insights on your captive peers can provide valuable insights and help you identify areas that may help enhance your competitive position
• Increasing market capacity – As a good rating can provide access to new and additional outward reinsurance markets, allowing your captive to take on more risk and potentially offer more competitive terms
• Reducing security demands – A strong rating can reduce fronting insurers’ security demands by providing assurance your captive can meet its liabilities, driving cost savings and driving improved operational efficiency
• Stronger negotiations with fronting carriers — A high rating can provide assurance to regulators and other counterparties about your captive financial standing, thereby strengthening your negotiating position
• Identifying opportunities for improvement – Maintaining ongoing communication and annual reviews with the rating agency can ensure your captive's rating remains current and to identify way to help maintain or even improve your rating over time.

When and how to consider deploying credit rating agencies for your captive

Deciding when and how to deploy credit rating agencies involves several key considerations. First, you need to assess whether obtaining a credit rating aligns with your business objectives. For example, if you aim to obtain enhanced market support terms, a credit rating can serve as a strong sales aid. It demonstrates to local regulators and customers your company is financially sound, particularly valuable in markets like the EU where credit ratings are highly regarded.

The costs associated with engaging a credit rating agency are another important factor to think about. The initial assessment of a captive company typically costs around $50,000, with annual costs ranging from $50,000 to $75,000.

You’ll also want to consider the time and involvement required from both the captive manager and the parent company.

Some first steps for any captive looking to get the most from working with credit ratings agencies include:

• Understand the rating process – Begin by familiarizing yourself with the rating process, which involves gathering financial statements and conducting financial testing. This foundational knowledge will help you navigate the rating process more effectively.
• Be ready to engage with rating agencies – Schedule meetings with your preferred rating agency to provide both quantitative and qualitative information about your captive’s operations, risk appetite and financial performance so it can make a thorough assessment.
• Use credit ratings agencies intelligence services – Gain valuable insights into market conditions and peer comparisons, market trends and emerging risks. This information can be instrumental in making informed decisions about your captive's operations and risk management strategies. By staying ahead of the curve, you can better protect your captive and ensure its long-term success.
• Leverage parent company relationships – You could lower costs and streamline the rating process and secure more favorable business terms with fronting insurers, reducing collateral requirements by calling on any existing relationship with the captive’s parent company.

The role of credit rating agencies in market transactions with captives

Credit rating agencies play a crucial role in market transactions involving captives. Their independent assessments provide assurance to third-party carriers and regulators your captive is financially sound. This can be particularly important when dealing with outwards reinsurance panels and fronting carrier partners.

Maintaining a good credit rating fosters long-term partnerships with agencies, which can be beneficial for your captive's growth and stability.

When many regulators require captives to demonstrate active monitoring of their credit ratings, working with a reputable agency can ensure your captive meets these regulatory requirements and avoids potential penalties.

To discover if a credit-rated captive might work to your risk financing advantage, get in touch with WTW’s global network of captive specialists or your local domicile captive management team.