21 December 2020

Captives in Bermuda, Cayman, Barbados outperform: AM Best

The operating results of captive insurance companies AM Best rates in Bermuda, Cayman Islands and Barbados continue to outperform their counterparts in the commercial casualty insurance sector, according to a new report by AM Best. The pre-tax operating income for this group reached the highest level ever recorded.

The rating agency’s new report, called ‘Bests Market Segment Report, Rated Bermuda, Cayman Islands, and Barbados Captives Continue to Outperform Peers’, states that AM Best’s rated Bermuda, Cayman Islands and Barbados (BCIB) captive composite reported a pre-tax income of approximately $1.4 billion, a 46 percent increase over the previous year.

The combined ratio for the composite saw a 6.9-percentage point deterioration to 91.8; however, the five-year (2015-2019) average combined ratio of 85.0 was approximately 15 points better than the 100.0 combined ratio posted by the BCIB captives peers in the commercial casualty segment.

Between 2015 and 2019, BCIB captives 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 translates into nearly $4.2 billion in savings. The new high-water mark in pretax operating income was driven by the improvement in the equity markets early in 2019, which bolstered realized and unrealized 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. 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 U.S. businesses, captives response could depend on whether the US passes a federal pandemic program. The terms and composition of any such program would be key as well that is, whether it is similar to the national flood program, 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.

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. These companies have essentially taken more ownership of their risks, making captives increasingly integral to corporations worldwide.

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, said John Andre, managing director, AM Best.