Cayman and Bermuda captives outperform commercial insurers

Captive insurers domiciled in Bermuda and the Cayman Islands posted strong operating earnings and outperformed commercial insurance companies, rating agency A.M. Best reported.

A.M. Best’s special report, “The Beat Goes On: Rated Bermuda & Cayman Captives Continue Their Strong Operating Performance,” noted that among the captives rated by the agency, “premium leverage ratios improved, as capital grew at a healthy rate of 8 percent, buoyed by strong operating earnings.”

The report highlighted that 2016 marked the fifth year of above-par operating results for captives with a total return on revenue of 23 percent, down from 24 percent in 2015.

“Underwriting results declined somewhat, to a combined ratio of 85.3 in 2016 from 80.0 the year before, but were well above the results posted by A.M. Best’s composite of U.S. commercial casualty insurers. In addition, the Bermuda and Cayman five-year [2012-2016] average combined ratio of 82.5 far exceeded the U.S. commercial casualty segment by more than 16 points,” the rating agency found.

A combined ratio of less than 100 indicates an underwriting profit, while a ratio of more than 100 means the insurer pays more in claims and expenses than it receives in premiums.

“The Bermuda and Cayman captives saw their net premiums earnings decrease for the first time in five years, to a modest 4.7 percent compared with a high single-digit growth that averaged 7 percent in the prior four years. This included a 10.1 percent growth in 2014, which was far greater than the premium growth reported by U.S. commercial casualty insurers over the same period,” A.M. Best said.

The rating agency noted that unlike traditional property and casualty insurers, captives are not pressured by stakeholders for returns on equity or revenue growth. In addition, extensive use of reinsurance allows captives to transfer a significant amount of catastrophe risk, resulting in less volatile results compared with traditional insurers.

“Bermuda and Cayman captives have posted strong, double-digit [return-on equity] despite difficult market conditions and challenges, with a five-year compound average growth rate of 13 percent for operating ROEs. Favorable reserve releases and limited catastrophe events are the two key contributors to their solid margins and strong ROEs,” A.M. Best stated.

The rating agency further predicts a healthy future for captive insurers “based on the success of the captive business model, the efficiencies gained from the use of alternative risk transfer and the benefits of increased risk awareness and loss control, as well as the ability to integrate sound risk management practices throughout the organization, all of which lead to operating results that outperform the commercial market.”

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