US rated captives outperform commercial peers in 2020: AM Best

Rated US captive insurance companies continued to outperform their commercial market peers in 2020, according to an AM Best report.

The report, titled Captives’ Flexibility and Control Enable Them to Outperform Commercial Peers, said that captives’ enhanced flexibility and control had given them an advantage over their commercial peers in 2020, driving profitability and retained earnings. Captives also create value for their policyholders and stakeholders, regardless of market conditions, AM Best said.

In 2020, AM Best-rated US captives reported pre tax operating income of $942 million. While this was slightly down from the $1.01 billion reported in 2019, AM Best said it was still a strong result, “particularly when compared with the results of the commercial casualty peer composite.”

AM Best-rated captives also reported a five-year average combined ratio of 83.4 percent, compared to 107.7 percent for their commercial counterparts. Year over year, the AM Best-rated US captives recorded a 4.1-percentage point improvement on their combined ratio to 97.9 in 2020.

AM Best reported that between 2016 and 2020 captives added $3.4 billion to their year-end surplus, while returning $5.2 billion in stockholder and policyholder dividends. This represents $8.6 billion in insurance cost savings that captives retained for their own organisations by not purchasing coverage from third parties in the commercial market, AM Best noted.

AM Best's report pointed out that captives tend to stay away from alternative investment strategies, despite the low interest rate environment. The key factors contributing to their success are strong risk management capabilities and strict loss control programmes, the rating agency said, providing an edge when it comes to emerging risks.

“These insurers have an exceptional ability to identify areas of emerging risk quickly, owing to their extensive, in-depth knowledge of the risks they insure, as well as the homogeneous nature of these risks,” AM Best concluded. “Policyholder retention is also a key to captives’ success; in particular, retention is very high for group captives and risk retention groups, resulting in lower acquisition costs.”