1 December 2021

Captives continue to outperform commercial insurers

Captives in Bermuda, the Caymans and Barbados (BCIB) continue to outshine commercial casualty insurers, according to ratings agency AM Best. According to the agency, the 25 captives it rates on the islands (out of 200 worldwide) have outperformed its US commercial casualty composite on both underwriting and operating profitability measures.

“These longstanding domiciles have global reputations conducive to maintaining and growing their captives,” the agencies market segment reports. The BCIB captives represent three of the seven largest global captive domiciles (encompassing 1,600 captives), it adds, with Bermuda leading the way, followed by the Cayman Islands in second and Barbados at number seven.

The pandemic has slowed new captive growth, it reports, and some captives have closed or merged, it reports. Others, however, have added, or are looking to add, new coverages to meet requirements arising from the pandemic.

“The benefits and consistency of local captive management and a captive-friendly regulatory environment have enabled Bermuda, the Cayman Islands, and Barbados to not just maintain, but even expand, their foothold in the captive market,” the analysts write.

About two-thirds of the rated captives are owned by US-based businesses or aligned with US groups. The operating results of the agency’s BCIB composite have been relatively consistent year over year, it says and are similar to rated captives domiciled in the US.

“Both captive groups have reported results that consistently outpace those of the traditional US commercial casualty insurers,” it finds, based on data for the 2020 fiscal year.

Results rebounded in 2020 following unusually large fire losses in 2019, It adds.

“The segment’s longer-term profitability still compares very favourably when measured against US commercial casualty peers. Since captives are usually formed to ensure insurance availability and consistency of costs through relatively stable premiums (in addition to their primary function of risk financing), operating profitability is a bonus for captives and their owners.”

The BCIB composite for the year shows an 85.1% combined ratio for 2020, an improvement from 91.2% in 2019 and the five year average of 86.2%. That compares with a five year average of 100.4% for the commercial casualty composite. This week, the agency also reported that increased losses and expenses saw the US property-casualty insurance industry post a $6.1 billion underwriting loss for the first nine months of 2021.

“The BCIB captives have also consistently posted near double-digit returns on equity (ROE), with a five-year average of 10%. Favourable prior-year reserve releases and generally limited exposures (other than a few shock losses) to catastrophe events were the two key contributors to solid margins and a strong ROE,” it adds.

While the agency warns against drawing wider conclusions due to the lack of public data on the larger number of unrated captives, the authors are optimistic.

“The operating fundamentals of captives depend on the risk financing needs of their owner – if the growth in the number of global captives is an appropriate indicator, they continue to serve the particular needs of those owners. AM Best believes, based on its observations of the rated captives, that virtually all highly regarded and highly rated parent organizations have well-run captives because they implement seamless risk management processes,” they conclude.

More on this story

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