Offshore captives outperform commercial casualty sector

Captive insurance companies in Bermuda, the Cayman Islands and Barbados rated by AM Best outperformed their counterparts in the commercial casualty sector, according to a market segment report released by the rating agency.

In 2018, net premiums earned by the captives surpassed $3.5 billion for the first time.

The reported pre-tax income of the AM Best’s rated captive composite grew by 8.3% compared to the previous year to about $1 billion.

The combined ratio for the Bermuda, Cayman Islands and Barbados captive composite deteriorated slightly in 2018 by a percentage point to 85.2. But their five-year average combined ratio of 80.8 was nearly 20 points better than the 100.4 combined ratio posted by the captives’ counterparts in the commercial casualty segment, AM Best found.

Between 2014 and 2018, the captives added $2.7 billion to their year-end capital and surplus and paid $1.4 billion in dividends.

“This translates into nearly $4.2 billion during this period either remaining with these captives or paid back to policyholders and stockholders instead of going to the commercial market,” the rating agency said.

The new high-water mark in net premiums earned comes as a result of strong economic growth in the US, and companies taking on new risk opportunities such as self-funded employee health insurance programmes and cyber liability, AM Best added.

According to the report, captives no longer are formed solely to protect against the lack of available capacity or peaks in the market cycle. Instead, they have become a solution for companies interested in flexibility, risk financing and more hands-on risk management for enhanced safety, loss control and loss prevention.

AM Best said captives have become more integral to corporations around the globe, with increased efficiencies and improved margins as a result of loss prevention and lower reinsurance costs being the main drivers.

Despite higher-than-average catastrophe loss years, offshore captives were able to keep loss ratios within a narrow band.

The report noted that while the purpose of captives may be to optimise risk financing, rather than to generate a profit, the offshore captive composite returned positive results in most years.

Because of their expertise, the similarity of the risks insured and their close proximity to those risks, captives “tend to be more nimble than the insurance industry overall and are able to adapt to these trends more quickly to improve outcomes faster than the standard market”, AM Best said.

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