AM Best: growing captive insurance market highlights risk management expertise
AM Best has published a new Best’s Market Segment report on the captive insurance market.
In it, AM Best said that captive use continues to expand in the persistently hard market through formations, increases in retentions, and inclusion of new lines of coverage.
The rating agency added that captives are an extension of an organisation’s enterprise risk management program and a viable alternative to the traditional commercial insurance market, accounting for approximately 25% of all commercial premium globally.
In addition, the underwriting performance of AM Best-rated captives continues to outperform commercial casualty peers.
From 2019 to 2023, AM Best-rated captives generated an estimated $6.3 billion—$4.3 billion surplus growth and $2.0 billion in dividends—that would otherwise have gone to the commercial market.
“The formation and use of existing captive insurance companies provides a viable enterprise risk management (ERM) alternative for companies that understand their own unique risks,” AM Best said in the report. When feasible, companies would prefer to get coverage from the commercial market, but where coverage appears overpriced for a company’s own perceived risk, captives continue to be a logical alternative, it added.
The rating agency said that typically, companies using captives look to customise their commercial insurance programs to have more decision-making authority and more control over managing these risks. In periods of insurance market hardening, captive-type vehicles can offer an effective and efficient option to support a parent’s ERM coverage requirements.
Benefits are especially pronounced in periods of sustained hardening as seen since late 2017. Higher than expected inflation, social inflation, medical inflation, and weather-related claims, primarily secondary perils, have contributed to the market hardening.
The increase in natural catastrophe loss costs prompted reinsurers to address pricing and terms and conditions in their own ERM efforts to fortify balance sheets. Commercial insureds that had the foresight to establish alternatives such as captives or cells benefited by offsetting some of the capacity costs and constraints for their required risks.
Captives, and cells within protected or segregated structures, offer an opportunity for policyholders to tailor specific risks by customising based on their own loss experience. This helps enterprises manage capital efficiency as captives often outperform the commercial market, coming in with better than modelled costs, flexibility in payouts, and maintaining viable capitalisation to cover future losses, as necessary.
AM Best also said that the cyber market has generally stabilised (not softened), but rapidly escalating pricing prompted captive owners to contemplate offering higher limits.
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