Best's Market Segment Report: U.S. Captive Insurance Stepping In Amid Capacity and Pricing Challenges
The U.S. captive insurance market segment continued to generate profits and surplus gains in 2021 while outperforming their commercial market peers, according to a new AM Best report.
The Best's Special Report, "U.S. Captive Insurance: Stepping In Amid Capacity and Pricing Challenges," states that AM Best-rated U.S. captives reported another strong year, with a pretax operating income of $1.0 billion, down modestly from the $1.1 billion reported in 2021. Additionally, the five-year average combined ratio of 84.5 posted by the AM Best-rated U.S. captives significantly outstripped the 99.4 of their commercial casualty peer composite. Year over year, these U.S. captives recorded a 1.8-percentage point improvement on their combined ratio to 85.4 in 2021. Overall, between 2017 and 2021, they added $4.3 billion to their year-end surplus while returning $5.8 billion in stockholder and policyholder dividends, representing $10.1 billion in insurance cost savings that the captives retained for their own organizations 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%.
Net investment income remains a strong contributor to operating profits despite weak returs from growing investment portfolios.
According to the report, the number of U.S. captives continues to rise, although the growth of captive formations was tempered by the onset of economic uncertainty resulting from the pandemic, as well as ongoing scrutiny from the IRS and greater regulatory and reporting requirements. However, 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."
To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=322542.
AM Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated in the United States and throughout the world. For current Best's Credit Ratings and independent data on the captive and alternative risk transfer insurance market, please visit www.ambest.com/captive.
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