According to a new report by rating agency AM Best, the US captive insurance market segment continued to generate profits and surplus gains in 2021, while outperforming its commercial market peers.
The report, titled “U.S. Captive Insurance: Stepping In Amid Capacity and Pricing Challenges,”, states that AM Best-rated US captives reported another strong year, with a pre-tax operating income of $1 billion, down from the $1.1 billion that was reported in 2021.
Moreover, the five-year average combined ratio of 84.5 posted by the AM Best-rated US captives significantly outstripped the 99.4 of their commercial casualty peer composite. Year-over-year, these US. captives recorded a 1.8-percentage point improvement on their combined ratio to 85.4 in 2021.
Between 2017 and 2021, they added $4.3 billion to their year-end surplus while returning $5.8 billion in stockholder and policyholder dividends, overall representing $10.1 billion in insurance cost savings that the captives retained for their own organisations by not purchasing coverage from third parties in the commercial market.
“The captive segment’s inherent flexibility and control in managing risk drives profitability and retains earnings while creating value for its policyholders and stakeholders, regardless of market conditions,” said Dan Teclaw, associate director, AM Best.
Investment returns remain a challenge for rated U.S. captive insurers. In 2021, net investment returns rose slightly, which when combined with higher capital gains, increased investment returns to 4.1% from 3.9%.
Meanwhile, the report also noted that net investment income remains a strong contributor to operating profits, despite weak returns from growing investment portfolios.
According to the report, the number of US captives continues to rise, although the growth of captive formations was tempered by the onset of economic uncertainty which resulted from the COVID-19 pandemic, as well as ongoing scrutiny from the IRS and greater regulatory and reporting requirements. However, AM Best noted that these conditions prompted insureds to explore the alternative and flexible solutions that captives can provide.
“Difficult commercial market conditions highlight the benefits of the captive segment and provide businesses an incentive to establish them,” said Fred Eslami, associate director, AM Best.
“In hard markets, some non-insurance companies may feel the commercial market does not understand or overprices their view of their own risks, so they investigate forming captives. This current environment allows captives to customize coverage for risks that may be uncommon or difficult to write or place in the standard market.”