Best Finds Captives Outperforming Commercial Casualty Market

An arrow is bouncing from the tops of a 3D growing circular bar graph which is sitting on top of financial reports

December 22, 2020 |

An arrow is bouncing from the tops of a 3D growing circular bar graph which is sitting on top of financial reports

Captive insurance companies in Bermuda, the Cayman Islands, and Barbados rated by A.M. Best outperform their counterparts in the commercial casualty insurance sector, according to the rating agency.

Meanwhile, 2019 pretax operating income for this group of captives was the highest ever recorded, according to A.M. Best.

According to a new Best's Market Segment Report, "Rated Bermuda, Cayman Islands, and Barbados Captives Continue to Outperform Peers," Best-rated captives in the three domiciles posted pretax income of approximately $1.4 billion, a 46 percent increase over the prior year.

The group's combined ratio saw a 6.9 percentage point deterioration to 91.8 percent, though the 5-year combined ratio of 85.0 percent was approximately 15 points better than the 100.0 percent combined ratio reported by the group's peers in the commercial casualty segment.

Between 2015 and 2019, rated captives in the three domiciles added $2.7 billion to their year-end capital and surplus and paid $1.4 billion in dividends, A.M. Best said.

"The use of captive vehicles during this period over the use of commercial insurers translates into nearly $4.2 billion in savings," an A.M. Best statement said. "The new high-water mark in pretax operating income was driven by the improvement in equity markets early in 2019, which bolstered realized and unrealized capital gains. In addition, net earned premium increased by nearly 10 percent to drive the higher income total."

The rating agency noted that captive parents are no longer forming captives solely to protect against the lack of available capacity or peaks in the market cycle. Instead, they've become a solution for companies seeking flexibility, risk financing, and more hands-on risk-management, A.M. Best said.

"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," John Andre, managing director at A.M. Best, said in the statement.

December 22, 2020