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

Copies of the letter were also sent to the CICA board and its 240 members, as well as to the National Association of Insurance Commissioners and senior insurance regulators of captive domiciles.

In the letter, addressed to Leo C. O'Neill, president of Standard & Poor's, Mr. Modecki said: "We demand an immediate retraction. The use of a captive, in and of itself, is not inherently riskier than purchasing insurance in the open market."

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

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

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

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

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

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

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

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

"In the meantime," Mr. Modecki told NU, a rating agency competitor of S&P's, Moody's, has received approval for its own captive in New York. The New York Insurance Department licensed Moody's Assurance Company Inc. as a captive in the state on June 18.