CICA Still Fuming Over Captive Slight
A letter from the president of Standard & Poor's to the president of a national captive association has failed to defuse the tension between the two parties over an S&P quote referring to the growth in captives during the hard market as "a time bomb waiting to explode."
The quote in dispute appeared in an Aug. 1 article in The Wall Street Journal, attributed to Don Watson, then Standard & Poor's managing director for insurance, who has since taken a new position at ACE Ltd. The article was headlined: "Risky Game: Companies Scrimp On Insurance Costs." (See NU, Aug. 12, page 29.)
After the article appeared, Carl Modecki, president of Minneapolis-based Captive Insurance Companies Association, sent a letter to Leo C. O'Neill, president of New York-based S&P, asking if he stood by the quote.
Mr. O'Neill replied in an Aug. 12 letter to CICA that, "while the words Mr. Watson used could be considered controversial, the message in the context of the article–that single-parent captives and self-insurance introduce vulnerability to corporate income statements–is one that we believe to be true."
Mr. O'Neill continued in the letter that, "while we agree that the majority of existing captives are financially sound (we have assigned secure-range financial strength ratings to several), the specialist underwriting, pricing, and reserving skills required to successfully create and manage a captive are substantial, and the absence of them lead to serious vulnerabilities to such companies."
Mr. Modecki said the response, "as far as I was concerned was a non-answer. It's like saying an airplane is an explosion waiting to happen if you don't have a good pilot."
CICA has extended invitations to S&P and Moody's to attend its members-only meeting in New York on Oct. 14, Mr. Modecki said. (A.M. Best is a third agency that rates captives, but as of this writing, had not been invited to address the CICA meeting.) "CICA hopes to do a presentation with Moody's and S&P on how they view and rate captives," he said. "So far, the organizations have not confirmed."
Mr. Modecki said he didn't know whether the controversy would be resolved at the October meeting, but "I would hope that we could at least clarify the positions of the two organizations, because S&P's comments are not very highly complimentary to the captive industry, and at the same time, Moody's is starting a captive."
Mr. Modecki continued that this indicates that "there is probably a big distinction between the way they view captives."
The issue, he said, is "hot on the table" because S&P has also begun rating captives, as the company stated in its Aug. 12 letter.
"We're not aware of any that they've given a poor rating to at the moment, and there just seems to be a difference of how one views captives," he added.
If the organizations are rating captives, Mr. Modecki explained, "it seems that we do a service to our members if we at least give them a heads-up. They have a choice on which group to rate them if they get rated. I would think they would prefer to be rated by Moody's, which has its own captive and hasn't said anything derogatory about the product."
Whether the organizations will accept CICA's invitation remains to be seen, he said. "All you can do is invite them. If you don't show, you let the membership know you don't think enough of them to show."
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, September 16, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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