Vermont leads from the front as US captives landscape evolves
In 2021 the number of US domestic captives grew to 3,153, from 3,107 in 2020, according to a new report by rating agency AM Best.
According to the company, post-pandemic economic activity and confidence resumed in 2021, but the insurance market remained challenged, charging premiums with increasingly restrictive coverage terms.
“The growth of captive formations was tempered by the onset of economic uncertainty resulting from the pandemic, as well as ongoing scrutiny from the IRS and greater regulatory and reporting requirements,” said Fred Eslami, associated director at AM Best. “However, these conditions prompted insureds to explore the alternative and flexible solutions that captives can afford.”
AM Best said that Vermont continues to lead the US captives market with 620 registered in the state. Second is Utah with 384, then Delaware with 313, North Carolina with 257, Hawaii with 251 and South Carolina with 183.
Since AM Best began annually reporting on the captive segment more than two decades ago, the operating performance of the US captives it rates has readily surpassed that of their commercial market peers.
According to AM Best the rated captives’ inherent flexibility and control managing risk drives profitability and retained earnings while creating value for their policyholders and stakeholders, regardless of market conditions. This pattern has been evident since the formation of the first captive, and the principles supporting this structure remain the same in 2021.
“One of the consistent themes for the captive segment has been its operating profitability,” said associate director Dan Teclaw. “Operating profits have declined as supplementary investment income has waned, but underwriting remains an effective risk management tool for these companies. The five-year average combined and operating ratios of the rated US captive insurance composite beat those of its commercial casualty peer composite by significant margins."
With the increase and complexity of cyber attacks continuing, AM Best expects the cyber market to remain hard for some time, resulting in a more challenging decision-making process for corporate insurance buyers. Market conditions have made single parent captives an attractive risk management option for their parent companies. Given their flexibility, these insurers can customise policies to mitigate the growing threat of these attacks and, along with their parents, respond more quickly to assess the damage and devise a plan of action for recovery.
