With the number of captives growing by 4.4% last year, the U.S. captive market enjoys an unparalleled position in the re/insurance value chain – disconnected from the competition and operating challenges felt by the rest of the sector it boasts strong financial positions and stable ratings, according to A.M. Bests’ U.S. captives briefing.
The rating agency explained that while the report focuses on the U.S. market captive insurance composite (CIC), it can be viewed as a snapshot of general trends across the global captive space since it captures many of the larger players.
As the exception to the industry’s otherwise thinly spun profit margins, captives have been re/insurers’ golden egg laying goose, with a still excellent profitability track record.
A.M. Best said “The CIC ended 2016 in strong form, with pretax profits up more than 15.8%, to $1.6 billion, including more than $803 million in underwriting profit, of which $491 million was related to favorable prior year reserve development.”
The outlook for the captive group is positive with results expected to remain favourable throughout the remainder of the year, although some pressure from the low-interest environment is likely to be inevitable.
Captive insurance premiums are made up mostly of liability lines – general liability, professional liability, workers’ compensation, and property – which increased by 3.2% last year, said A.M. Best.
A.M. Best explained that while its outlook for the U.S. commercial segment is negative, captives are exempt from the conditions impacting the broader market, they are a “sub-sector of the commercial lines industry but with distinct nuances and differences.”
“Captives’ risk premiums are generally flat, barring changes in their risk appetite/risk tolerance (deductibles/self-insured retentions), or if retroactive pricing adjustments or changes in reinsurance costs or in loss costs warrant a rate increase.
“The captive sector has virtually no competition from the commercial market for business, with renewal rates well over 90% for the rated group captives and RRGs.
“The uniqueness of the captives’ loss control, claims handling, and policy form functions makes for standards that are exceptionally difficult to replicate.”
The A.M. Best outlook for the captive market for 2017 is favourable, given the expected favourable prior year reserve development , its impact on combined ratios, and captive insurers continuing to use reserves to defer taxes and for tax compliance: “Captives conservative nature, intimate knowledge of their insured risks, and superior loss control services should result in strong underwriting performance and favorable loss reserve development for years to come.
“Underwriting profits will continue to be returned to policyholders in the form of dividends, a trademark of the sector.
“It is this alignment between captives and policyholders that leads to superior underwriting results and also allows for captives to set sufficient rates.”
Investment yields for captives invested assets are expected to remain low, since bonds make up most of these assets and the bond market this year has been marked by low yield.
Consequently, captives will have to rely on strong underwriting performance for operating success.
A.M. Best said pressure on captives has come from low investment returns and regulatory changes, but despite these challenges, they’ve maintained excellent profitability, with new spaces for growth such as cyber and MPL emerging.
In addition, the establishment of captive insurance entities presents significant regulatory and tax advantages which reduce costs and create a beneficial operating environment, meaning the group will continue to cover a vital role for market participants.