Best’s Special Report: U.S. Rated Captives Sustain Their Strong Performance in 2016

Business Wire

OLDWICK, N.J.,--(BUSINESS WIRE)-- U.S. captive insurance companies rated by A.M. Best ended 2016 in strong form, with a 16% year-over-year increase on pretax operating income to $1.6 billion, which included more than $803 million in underwriting profit, according to a new A.M. Best special report.

The Best’s Special Report, titled, “Groundhog Day: More of the Same Strong Performance for the U.S. Rated Captives,” notes that captive insurers and other alternative risk transfer mechanisms continue to play vital roles in the U.S. and global commercial markets. Although the sector’s revenue accounts for less than 10% of the estimated global commercial market of $800 billion, captives have become an integral and well-established part of the overall market.

The rated captive sector recorded a combined ratio of 82.9 in 2016, which is a 4.0-point improvement over the previous year and 5.3 points better the five-year average. Additionally, A.M. Best’s captive composite continues to outperform the broader commercial market, as the 88.2 five-year combined ratio average compares favorably with the 100.1 posted by the commercial composite.

Premium increased modestly for the A.M. Best-rated captive sector, evidenced by a 3.2% rise in net premiums in this sector after two years of slight percentage declines. This minimal year-over-year change in premium is typical of captives whose mission is to provide its insureds with availability and price stability. Although captives are not intended to be profit-making entities, their earnings are viewed as insurance expense savings that stakeholders would otherwise pass on to traditional commercial insurers. According to the report, during the past five years, more than $3 billion of after tax profits were garnered and went into the pockets of rated U.S. single parent captives and their parents, instead of being spent in the commercial market.

Risk retention groups (representing 13% of A.M. Best’s captive composite premium) saw its performance weaken in 2016 as the combined ratio deteriorated to 97.0 from 88.4; however, the composite was still profitable, compliments of high policyholder retention and prudent risk management.

Captives’ conservative nature, intimate knowledge of their insured risks and superior loss control services should result in strong underwriting performance and favorable loss reserve development for years to come. Underwriting profits will continue to be returned to policyholders in the form of dividends, a trademark of the sector. It is this alignment between captives and policyholders that leads to superior underwriting results and also allows for captives to set sufficient rates. However, though captives are insulated from most of the competitive forces that commercial insurers face, no insurer can avoid the challenges that today’s economy presents.

To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=264204.

A.M. Best is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.

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