4 August 2017Analysis

Captives play ‘vital role’ in US and global markets: AM Best

Captive insurers and other alternative risk transfer mechanisms continue to play vital roles in the US and global commercial markets, according to an AM Best special report. US captives rated by AM Best ended 2016 with a 16 percent year-on-year increase on pre-tax operating income to $1.6 billion, including more than $803 million in underwriting profit. The report, ‘Groundhog Day: More of the Same Strong Performance for the US Rated Captives’, suggested that captives have become an integral and well-established part of the overall market, despite the sector’s revenue accounting for less than 10 percent of the estimated global commercial market of $800 billion. The combined ratio for the rated captive sector in 2016 was 82.9 percent, an improvement of 4.0 percentage points year-on-year and 5.3 points better than the five-year average. AM Best’s captive composite also continue to out perform the broader commercial market, as the 88.2 percent five-year combined ratio average compares favourably with the 100.1 percent posted by the commercial composite.  Net premiums in the sector rose by 3.2 percent, 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,” the ratings agency stated. During the past five years, more than $3 billion of after tax profits were garnered and went into the pockets of rated US single parent captives and their parents, instead of being spent in the commercial market. “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,” AM Best continued. Risk retention groups, which represent 13 percent of AM Best’s captive composite premium saw its combined ratio deteriorate to 97.0 percent from 88.4 percent, however the composite was still profitable, which the ratings agency attributes partially to high policyholder retention and prudent risk management. AM Best commented: “Captives’ conservative nature, intimate knowledge of their insured risks and superior loss control services should result in strong underwriting performance and favourable 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.”