Captives continue to outperform rivals across world
Global credit ratings agency AM Best has given high ratings for captive insurance companies in Bermuda, The Cayman Islands and Barbados.
In its just released, Best Market Segment Report, AM Best pointed out that the captive insurance companies in the three named Caribbean territories, “continue to outperform the segment’s counterparts in the commercial casualty insurance sector, and in 2019, pre-tax operating income for this group reached the highest level ever recorded”.
A captive insurer is generally defined as an insurance company that is wholly owned and controlled by its insured with its primary purpose of insuring the risks of its owners so that they benefit from the captive insurer’s underwriting profits.
Details of AM Best assessment
In its assessment, AM Best pointed out that Bermuda, Cayman Islands and Barbados (BCIB) captive composite reported a pre-tax income of approximately $1.4 billion, a 46 per cent increase over the previous year. The combined ratio for the composite saw a 6.9 percentage point deterioration to 91.8.
However, the five-year (2015-2019) average combined ratio of 85.0 was approximately 15 points better than the 100.0 combined ratio posted by the BCIB captives’ peers in the commercial casualty segment. Between 2015 and 2019, BCIB captives added $2.7 billion to their year-end capital and surplus and paid $1.4 billion in dividends.
Billions in savings
The use of captive vehicles during this period over the use of commercial insurers translates into nearly $4.2 billion in savings. The new high-water mark in pre-tax operating income was driven by the improvement in the equity markets early in 2019, which bolstered realised and unrealised capital gains.
In addition, net earned premium increased by nearly 10 per cent to drive the higher income total. The growth in captives’ earned premiums was due mainly to the firming of U.S. commercial lines.
AM Best argues that whether the captive market will respond to the COVID-19 crisis with new coverages or premiums written remains to be seen. However, due to their concentration in U.S. businesses, captives’ response could depend on whether the United States passes a federal pandemic programme.
“The terms and composition of any such programme would be key as well — that is, whether it is similar to the national flood programme, with insurance provided by the U.S. government, or if it more closely resembles a joint public/private programme like those for terrorism and crop,” AM Best reports.
The ratings agency added that, “captives no longer are formed solely to protect against the lack of available capacity or peaks in the market cycle. Instead, they have become a solution for companies interested in flexibility, risk financing and more hands-on risk management for enhanced safety, loss control and loss prevention”.
AM Best contends that these companies have essentially taken more ownership of their risks, making captives increasingly integral to corporations worldwide.”
According to John Andre, managing director of AM Best, “because of their expertise, the homogeneity of the risks they insure and their close proximity to those risks, captives tend to be more nimble than the insurance industry overall and have generally been able to adapt and improve outcomes faster than the standard market”.