WSJ Captive Article Riles CICA

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By Caroline McDonald

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NU Online News Service, Aug. 7, 1:45 p.m.EST--The president of a captive association is fightingmad about an article last week in The Wall Street Journalthat described captive insurers as "a time bomb waiting toexplode."

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The Aug. 1 article, "Risky Game: Companies Scrimp On InsuranceCosts," quoted Don Watson, then Standard & Poor's managingdirector for insurance (who has since left S&P to take a newposition at ACE Ltd.), as saying: "What happens with all thissudden interest in captives is that you're transferringvulnerability onto corporate income statements. Captives are a timebomb waiting to explode."

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Carl Modecki, president of the Captive Insurance CompaniesAssociation in Minneapolis, and principal of Carl A. ModeckiConsulting Services in Tallahassee, Fla., sent a letter to S&Pasking the ratings agency if they stand by Mr. Watson's quote.

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Copies of the letter were also sent to the CICA board and its240 members, as well as to the National Association of InsuranceCommissioners and senior insurance regulators of captivedomiciles.

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In the letter, addressed to Leo C. O'Neill, president ofStandard & Poor's, Mr. Modecki said: "We demand an immediateretraction. The use of a captive, in and of itself, is notinherently riskier than purchasing insurance in the openmarket."

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Bob Partridge, managing director of the insurance ratings groupat S&P in New York, who will be taking over Mr. Watson'sresponsibilities, responded to NU's call for a reaction,saying that Mr. Watson's quote "needed some clarification."

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Captives, he said, "in and of themselves can be as efficient andas effective as primary insurance companies, if they're well runand well managed. There is nothing structurally wrong with captivesas a risk mechanism."

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Mr. Partridge explained that S&P has extensive criteria forrating captives, and that captives can receive "highinvestment-grade or better ratings" that can easily be "up into the'A' and 'AA' range."

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He cautioned, however, that in the current market there are"significant pressures for companies that manage captives to managetheir captives more aggressively."

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If captives are not managed correctly, he said, "then Don'squote can be appropriate--they can be a time bomb waiting toexplode. Because what you are doing at that point is simplytransferring risk from one balance sheet to another."

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Mr. Modecki also took exception to the inclusion in theJournal article of a captive dispute involving U.S.accounting firm Arthur Andersen LLP, which he believed implied thatcaptives were somehow unreliable.

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The article stated that Anderson, "the beleaguered U.S.accounting firm, paid premiums to a captive formed by member firmsof Swiss-based Andersen Worldwide SC in the mid-1990s, when premiumrates for accountants skyrocketed." The article went on to reportthat earlier this year, when Arthur Andersen "tried to tap theinsurer to pay a proposed legal settlement, the captive was unableto do so because of mounting liabilities and a missed premiumpayment by Arthur Andersen."

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"The Anderson issue has nothing to do with anything?It's aseparate corporation," said Mr. Modecki. In his letter to S&P,he said that "the Anderson issue was the result of the failure topay the premium. Any commercial insurer would likely have deniedcoverage entirely as a result of the nonpayment. To the credit ofcaptive insurers, at least they will work with their insureds toavoid disputes."

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"In the meantime," Mr. Modecki told NU, a rating agencycompetitor of S&P's, Moody's, has received approval for its owncaptive in New York. The New York Insurance Department licensedMoody's Assurance Company Inc. as a captive in the state on June18.

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