The captive insurance markets in Bermuda, the Cayman Islands and Barbados (BCIBs) continue to post strong double-digit RoEs and outperform more traditional commercial markets, according to analysts at A.M. Best.
The rating agency noted that captive insurers remain the beneficiaries of very productive business models and strong loss control and risk management practices, which has historically resulted in solid underwriting profits and strong growth in surplus.
This proved to be the case in 2017, when rated BCIBs posted profitable financial results in line with historical averages despite challenging conditions, with total assets increasing by 7.7% and policyholder surplus by 11.4%.
Underwriting results declined somewhat but were still well above the results posted by A.M. Best’s composite of U.S commercial casualty insurers, and the BCIBs’ five-year average combined ratio also exceeded that of their peers in the U.S commercial casualty segment by nearly 21 points.
A.M. Best believes that the captive segment in general will continue to outperform the U.S commercial casualty composite by a healthy margin, by managing the risks it knows better than commercial insurers and by retaining risks within its risk tolerances.
Unlike traditional property and casualty (P&C) insurers, captives are not pressured by stakeholders for a return on equity or revenue growth, and their extensive use of reinsurance allows these companies to transfer a significant amount of catastrophe risk and mitigate the volatility of their results.
Favourable reserve releases and generally limited exposure to catastrophe events are two key contributors to captives’ solid margins and strong RoE, while their approach to risk and their ability to be nimble allow them to avoid many of the challenges facing most standard market insurers, analysts said.
However, the captive segment has faced a number of headwinds in 2018, most notably from tax reform in the U.S, which they have responded to with flexible enterprise risk management (ERM) strategies.
