In a recent report by AM Best, it has been revealed that captive insurance companies, those rated by AM Best, experienced a remarkable year in 2022.
These captive insurers achieved a notable doubling of pretax operating income compared to the previous year, alongside marking the most substantial premium increase in the last ten years.
The success of captive insurers continues to stand out when compared to commercial casualty composites, showcasing a significant performance advantage. The five-year average combined ratio of the captive insurance composite was recorded at an impressive 83.9, while the commercial casualty composite lagged behind at 98.0.
This superior performance not only resulted in remarkable growth in captives’ retained earnings and surplus but also translated into billions of dollars in savings for captive owners.
The captive composite’s combined ratio for 2022 reached 80.8, a notable enhancement of 4.6 percentage points from the previous year. This improvement was primarily attributed to a decline of 2.9 percentage points in the underwriting expense ratio.
Dan Teclaw, Director at AM Best, highlighted the beneficial environment for captive insurance, citing the hardening market conditions across various property/casualty lines of business. He emphasised that captives have the flexibility to finely adjust their risk appetites, thereby optimising returns on capital through prudent risk selection and underwriting practices.
The report underscored the expansion of captive use, evidenced by the substantial savings accumulated over the past four years.
Between 2018 and 2022, captives amassed an impressive $9.4 billion in savings, comprising $4.1 billion in surplus growth and an additional $5.3 billion in dividends that would otherwise have been directed to the commercial market for coverage.
A significant development noted in the report was the robust growth in direct premiums written among the group of rated captives, surging by 21% year over year. This marked the most substantial increase witnessed in a decade. The driving factors behind this surge were primarily attributed to rate hikes arising from inflationary pressures and the continuous hardening of the reinsurance market.
The overall findings of the report affirm that the exceptional underwriting performance of captives, combined with their ability to generate substantial savings, reinforces their pivotal role as valuable risk management tools for businesses.
Despite the evolving market landscape, captives continue to demonstrate their reliability and effectiveness in managing risks and optimising financial outcomes.
Fred Eslami, Associate Director at AM Best, noted that captives, although not initially designed to function as profit centers, have consistently demonstrated high profitability. He expressed confidence that, barring unforeseen catastrophic events, captives are likely to sustain their favourable results throughout 2023.
