A.M. Best-Rated Captives and Alternative Risk Profits Are Up Nearly 16%

As a lead-up to the 32nd Annual Captive Insurance Conference hosted by the Vermont Captive Insurance Association (VCIA), A.M. Best has released Groundhog Day: More of the Same Strong Performance for the U.S. Rated Captives, its latest special report on the financial performance of A.M. Best-rated US captives. (It is available through subscription only.) The report shows A.M. Best-rated captives and other alternative risk transfer mechanisms posted excellent results in 2016, with pretax profits up nearly 16 percent year over year.

A.M. Best has outlined key points by analysts about the report and its approach to the captive and alternative risk market.

About A.M. Best’s Captive Insurance Coverage

• A.M. Best captive ratings cover US-domiciled group captives, risk retention groups (RRGs), and single-parent captives. It rates more than 200 captives and alternative market entities in over 20 global jurisdictions and in more than 30 US states.
• Captive insurers rated by A.M. Best ended 2016 in strong form. Pretax operating income for this sector was $1.6 billion, including more than $803 million in underwriting profit, of which $491 million was related to favorable prior-year reserve development.
• A.M. Best does not issue a formal outlook for its rated captive sector, but it does not see this segment as having the same operating challenges as the overall US commercial lines segment, for which A.M. Best maintains a negative rating outlook. Its captive ratings are a very small portion of this larger group.

Overall Captive Market Results

• Premium increased modestly for the A.M. Best-rated captive sector, evidenced by a 3.2-percent rise in net premiums after 2 years of slight percentage declines. This minimal year-over-year change in premium is typical of captives, which focus on providing availability and price stability to insureds.
• The rated captive sector recorded a combined ratio of 82.9, a 4-point improvement over the previous year and 5.3 points better the 5-year average. A.M. Best expects positive underwriting results in 2017 as well.
• Overall, A.M. Best’s captive composite continues to outperform the broader commercial market, with a 5-year combined ratio average of 88.2, compared with the 100.1 combined ratio posted by the commercial composite.

Single-Parent and RRG Market Results

• Single-parent captives (representing 32 percent of A.M. Best captive composite premium) have experienced sustained growth as corporate interest remains strong. During the past 5 years, after-tax profits after dividends totaling more than $3 billion have remained with these single-parent captives instead of being spent in the commercial market.>
• A 15.8-percent favorable variance in the 5-year average loss adjustment expense ratio by the single-parent captive population over the commercial lines composite reflects the proactive and customized loss-control practices employed by A.M. Best-rated single-parent captives
• RRGs, which represent 13 percent of A.M. Best captive composite premium, saw their performance weaken in 2016 as the combined ratio deteriorated to 97.0 from 88.4. But high policyholder retention and prudent risk management helped the composite remain profitable.

Captive Market Issues and Trends

• Cyber liability remains a growth area, albeit a relatively small one compared with other lines of business. This is evidenced by a 64 percent year-over-year increase in direct written premiums by captives that filed the National Association of Insurance Commissioners (NAIC) Cybersecurity and Identity Theft Insurance Coverage Supplement. A.M. Best believes new and revised cyber security regulations in New York—the first US state to implement such regulations—as a potential model for other states. Although certain captive insurers and RRGs are exempt, they will need to remain vigilant to safeguard against cyber attacks.
• North Carolina, Georgia, Texas, Connecticut, and Tennessee saw the largest increases in the number of captives, as states continue to enact bills to attract and retain captives and to generate revenue. States also have sought to leverage self-procurement taxes in their favor to encourage captive growth.
• The increased allowance of agency captives—most recently enacted in Vermont—is part of domiciles' push to attract and retain captive insurers. A.M. Best thinks this highlights the industry’s desire to broaden its scope beyond its core captive membership base. Domiciles also increasingly have allowed for dormancy status, which can be used to help manage underwriting cycles. (A.M. Best-rated carriers may not maintain rating coverage if they are dormant.)