Ralph Cagnetta, managing senior financial analyst with A.M. Best, said the company began rating captives as long ago as 20 years. Since Sept. 11, he said, "Our services seem to be put back on the radar screen in terms of rating captives. You have a lot of risk managers at companies who are at least taking a look at the self insurance option," he said.

Mr. Cagnetta said the types of captives demanding ratings are "across the board. Insureds are looking at significant reduction in coverage or increases in rates in the traditional market." Simultaneously, he said, risk managers and associations are looking to self insure.

Captives require ratings for several reasons, he explained, "whether it's a risk manager demonstrating to the CFO that the captive is a viable option," or regulatory standards that may require a rating. Other times, he said, financial institutions may require a rating. Stakeholders also "may want the captive validated by an independent party," he said.

A.M. Best said its analysts evaluate a single-parent captive in a manner similar to that used with a commercial insurance company but with consideration given to the financial risk of the parent.

A.M. Best applies its risk-evaluation process to the parent and its relationship to its captive. The same analytical team that evaluates the financial strength of the captive handles the analysis of the parent company, according to the rating organization.

Analysis of A.M. Best's parent company primarily focuses on capitalization (quantity and quality), financial flexibility and ownership structure. A.M. Best said it assesses how the parent company's risk ultimately may affect the captive on a case-by-case basis.

In addition, the rating organization said it evaluates the parent's long-term commitment to the captive, that is its willingness to provide capital when needed.

A single-parent captive can have a great deal of financial flexibility because of its relationship with its parent, according to A.M. Best. However, if a parent is unwilling or unable to provide for its captive or if it consistently constrains capital through stockholder dividends to the point that leverage becomes excessive, the rating assigned to the captive will reflect those circumstances.

A.M. Best said it places great emphasis on parental commitment in maintaining the surplus of a single-parent captive at prudent levels.

The quality of a captive's capital, it said, will determine the weighting applied to the parent company's financial risk and flexibility in the assignment of an appropriate rating to the captive.

High-quality capital generated internally by the captive at arm's length from the parent will result in a Best's Rating that is based more on the merits of the captive itself and is less subject to change due to events at the parent company, according to A.M. Best.