Best’s Market Segment Report: U.S. Captive Insurers’ Flexibility, Control Enable Them to Outperform Commercial Peers

OLDWICK, N.J.--(BUSINESS WIRE)-- The operating performance of rated U.S. captive insurance companies continued to surpass that of their commercial market peers in 2020 alongside emerging areas of growth due to COVID-19-fueled market conditions, according to a new AM Best report.

The new Best’s Market Segment Report, “Captives’ Flexibility and Control Enable Them to Outperform Commercial Peers,” states that captives’ inherent flexibility and control in managing risk drives profitability and retained earnings, while creating value for their policyholders and stakeholders, regardless of market conditions. In 2020, AM Best-rated U.S. captives reported another strong year, with a pretax operating income of $942 million, down modestly from the $1.01 billion reported in 2019, but still strong—particularly when compared with the results of the commercial casualty peer composite. Additionally, the five-year average combined ratio of 83.4 posted by the AM Best-rated U.S. captives outstripped the 107.7 of their commercial counterparts by a wide margin. Year over year, the AM Best-rated U.S. captives recorded a 4.1-percentage point improvement on their combined ratio to 97.9 in 2020. Overall, between 2016 and 2020, captives added $3.4 billion to their year-end surplus while returning $5.2 billion in stockholder and policyholder dividends, representing $8.6 billion in insurance cost savings that captives retained for their own organizations by not purchasing coverage from third parties in the commercial market.

With the hardened commercial insurance market and increased cost of reinsurance, captives are balancing risk appetites with self-insurance savings to determine whether or by how much to increase net retentions or to participate in the reinsurance tower to manage costs. The report states that captives continue to explore coverages for employee benefits and medical stop loss, as well as in writing traditional lines of business where rates have climbed following catastrophe losses or those with ongoing uncertainty related to COVID-19; for example, directors and officers, errors and omissions and commercial auto liability insurance.

Overall, captive insurers remain nimble and stable despite persistently low interest rates and the recent turbulence in equities. Captives also tend to stay away from alternative investment strategies despite the low interest rate environment. Some of the key factors contributing to AM Best-rated captives’ success are strong risk management capabilities and strict loss control programs, providing an edge when it comes to emerging risks. These insurers have an exceptional ability to identify areas of emerging risk quickly, owing to their extensive, in-depth knowledge of the risks they insure, as well as the homogeneous nature of these risks. Policyholder retention is also a key to captives’ success; in particular, retention is very high for group captives and risk retention groups, resulting in lower acquisition costs.

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=311400.

AM Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated in the United States and throughout the world. For current Best’s Credit Ratings and independent data on the captive and alternative risk transfer insurance market, please visit www.ambest.com/captive.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

Copyright © 2021 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.

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Source: AM Best