Warning over captive credit risk

Insurers who front for captive insurance companies are facing pressure from their own rating agencie...

Insurers who front for captive insurance companies are facing pressure from their own rating agencies over the credit risks they are taking on, Clive Tobin, chief executive officer of XL Insurance, has warned.

Speaking at the biennial forum of the Federation of European Risk Management Associations, Mr Tobin said that since 11 September 2001, rating agencies have started to take a greater interest in how captives could affect insurers' balance sheets. Unless the captive has its own credit rating or a letter of credit from its parent, rating agencies could penalise the fronting company and treat the asset as below investment grade.

Mr Tobin added that caution about captives extends to the reinsurance relationship. "The days of a captive writing huge programme limits and then reinsuring into the market have become very difficult. If the captive takes $400m (£226.2m) and wants to reinsure $350m, it will be much more difficult than in the past."

Mr Tobin's co-participant on the Ferma stand, Patrick Thomas, development director of Aon Global Business, argued that companies had responded to shrinking capacity and falling risk appetite in the commercial insurance market by setting up captives.

He said that insurance companies were more vulnerable to the failure of a reinsurer, where the market had become very concentrated, than to the failure of a captive. "A small number of captives have gone out of business in recent years but this is a smaller number than the reinsurers who have gone out of business and left their debts and claims unpaid."


The Securities and Exchange Commission, has eased some rules to help insurers and reinsurers raise money from capital markets more quickly and pay claims in the wake of Hurricanes Katrina and Rita. The SEC said it was vital to eliminate delays in the capital-raising process because rating agencies are warning of possible downgrades due to concern the storms may leave some insurers short of available cash. Filings by insurers and reinsurers under the Securities Act will be processed in at least five business days, the SEC said.

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