Rated captive segment continues to outperform commercial sector – AM Best

The rated captive segment remains exceptionally strong and continues to outperform its counterparts in the commercial casualty segment, according to a new study from AM Best. “Captives generally outperform the commercial market. Since they rarely seek out new, unrelated classes of business, these companies rarely stumble into poor risk selection or underpricing, and so have more consistent business profiles,” the study states. The ratings agency currently rates about 140 captives in the US and more than 200 worldwide. Best’s captive insurance composite ended 2017 with a pre-tax profit of $1.3bn. Although down nearly 18% from the $1.58bn reported in 2016, the US captive market continues to fulfil its mission, says the study. Despite the decline, the composite posted a combined ratio (after dividends) of 91.4% and a net underwriting profit of $390.6m. Best points out that although captives are not intended to be profit-making entities, underwriting profitability and overall earnings are still important. “For captives, underwriting profit can be viewed as both insurance [and] expense savings that stakeholders would otherwise pass on to traditional commercial insurers,” the study states. The study notes many of the strengths of rated captives, and single parent captives (SPCs) in particular: “The aims of SPCs – those rated by Best as well as virtually all SPCs around the world – are closely aligned with their parents’ corporate risk management programmes. These programs are often supplemented by robust processes for loss control, safety, and risk management, that make captives even more attractive to the reinsurance market.” It points out that captives generally have strong risk management capabilities, strict loss control programmes and are often ahead of the curve when it comes to emerging risks. “These insurers have an uncommon ability to identify areas of emerging risk quickly, owing to their extensive, in-depth knowledge of the risks they insure and the homogeneous nature of these risks,” the study says. The study compares the results of the 140 rated US captives in the captive insurance composite (CIC) and the commercial casualty composite (CCC). It notes that the CIC’s results continue to clearly outpace the underwriting and operating results of the CCC – for example, the CIC’s 86.4% and 88.0% five- and ten-year combined ratios, compared with the CCC’s respective 99.9% and 101.4%. “The reasons for the CICs outperforming the CCC remain: (1) the captives’ ability to efficiently and prudently manage and mitigate losses; (2) their very robust and focused risk management programmes; (3) their ability to control cost of risk; (4) their efficient use of reinsurance and flexibility to avoid or minimise the effects of general insurance market cycles and thus minimise price volatility; and (5) their focus on writing more profitable coverages and limits with low severity,” the study reveals. It points out that one major advantage that captives have over the commercial group is the segment’s significantly lower underwriting expense ratio (about 18 points annually, compared to the CCC’s c.30 points). It explains that although other operating expenses are lower, almost all of the advantage comes from the CIC’s lower net acquisition expenses. “This is driven by the fact that all captives operate directly, with just some incidental expenses recorded for commissions. For those captives that are heavy reinsurance users, a portion of these savings is related to ceding commissions. Best believes that the approximate 12-point average total expense savings is a major plus for the CIC, especially when some of the savings is channelled into loss and safety controls, which further helps the bottom line,” the study notes.

Rated captive segment continues to outperform commercial sector – AM Best

Want to read this article?

Read Next

Marsh tracks slowdown in global Q1 rate hikes

Markel names head of terrorism in London

Insurers defend Nord Stream’s €400m lawsuit as act of war

Allstate posts nat cat loss of $343m for March

UAE flash flood losses manageable as insurers adapt to changing weather

Marsh tracks slowdown in global Q1 rate hikes

Markel names head of terrorism in London

Insurers defend Nord Stream’s €400m lawsuit as act of war

Allstate posts nat cat loss of $343m for March

UAE flash flood losses manageable as insurers adapt to changing weather

Want to read this article?

Read Next

Marsh tracks slowdown in global Q1 rate hikes

Markel names head of terrorism in London

Insurers defend Nord Stream’s €400m lawsuit as act of war

Allstate posts nat cat loss of $343m for March

UAE flash flood losses manageable as insurers adapt to changing weather

Related Articles