AM Best-rated captives continue to outperform commercial insurers

The operating results of captive insurance companies rated by AM Best in Bermuda, Cayman Islands and Barbados continue to outperform the segment’s counterparts in the commercial casualty insurance sector.

In 2019, pretax operating income of these captives reached the highest level ever recorded, according to a market segment report by the rating agency.

The AM Best-rated Bermuda, Cayman Islands and Barbados (BCIB) captive composite reported a pretax income of approximately $1.4 billion, a 46% increase over the previous year.

The combined ratio for the group saw a 6.9-percentage point deterioration to 91.8.

However, the five-year average combined ratio of 85.0 from 2015 to 2019 was approximately 15 points better than the 100.0 combined ratio posted by the BCIB captive insurers’ peers in the commercial casualty segment.

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During the five-year period, rated captives in the three jurisdictions added $2.7 billion to their year-end capital and surplus and paid $1.4 billion in dividends.

The use of captive vehicles during this period over the use of commercial insurers translated into nearly $4.2 billion in savings.

The rating agency noted that 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. The report said, “These companies have essentially taken more ownership of their risks, making captives increasingly integral to corporations worldwide.”

John Andre, managing director at AM Best, said, “Because of their expertise, the homogeneity of the risks they insure and their close proximity to those risks, captives tend to be more nimble than the insurance industry overall and have generally been able to adapt and improve outcomes faster than the standard market.”

The new high-water mark in pretax operating income was driven by the improvement in the equity markets early in 2019, which bolstered realised and unrealised capital gains. In addition, net earned premium increased by nearly 10% to drive the higher income total.

Growth in captives’ earned premiums is due mainly to the firming of US commercial lines during that time.

The rating agency said whether the captive market will respond to the COVID-19 crisis with new coverages or premiums written remains to be seen. Due to their concentration in US businesses, captives’ response much depends on the US federal pandemic programme.

AM Best said, “The terms and composition of any such programme would be key as well – that is, whether it is similar to the national flood programme, with insurance provided by the U.S. government, or if it more closely resembles a joint public/private program like those for terrorism and crop.”

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