Captive Industry Financially Strong Amid Competitive Commercial Market

Even amid a highly competitive traditional commercial market, the captive insurance company industry remains financially very strong, according to a new A.M. Best Company, Inc., report.

Between 2014 and 2018, year-end surpluses of US captives rated by Best (around 200 captives worldwide (140 US domiciled)) rose by $3.1 billion, hitting nearly $23.6 billion at the end of last year.

During the same period, captive assets jumped to $37.7 billion from $35.7 billion, while captives paid out $1.6 billion in stockholder dividends and $1.9 billion in policyholder dividends.

"In other words, $6.6 billion remained with the captives or paid back to their policy and stockholders, money that would otherwise have been spent in the commercial market if these captives did not exist," according to the Best report, Rated Captives Continue to Build Upon Strengths.

In addition, captives have far lower underwriting expenses than commercial insurers. Captives' underwriting expenses averaged 19.4 percent over the last 5 years compared to 30.2 percent for commercial insurers.

On the other hand, captives in 2018 reported a pretax profit of $1.1 billion, down from $1.3 billion in 2017. In all, captives last year posted a combined ratio (post dividends) of 96 percent and a net underwriting profit of $160 million.

"A closer look at 2018 shows that Hurricanes Michael and Florence and California wildfires likely played a material role in the muted results," the report noted.

Looking at just single-parent captives rated by Best and based in the United States, the report found continued strength in their financial condition. For example, from 2014 through 2018, single-parent captive surpluses jumped from $8.3 billion to $10.2 billion.

Other types of captives, though, did not do quite as well financially. For example, risk retention groups (RRGs), a special type of captive authorized under legislation Congress passed in 1981 and then broadened in 1986 to allow RRGs to write all casualty coverages except workers compensation to their member-owners, saw their 2018 year-end surplus—just over $2.4 billion—fall about 1 percent from the prior year.

At the same time, RRG formations in recent years, the report noted, have "slowed significantly" in recent years due to soft conditions in the commercial market "as potential member/policyholders are readily able to buy insurance at cost-effective prices," the report noted.

Still, depending on future market conditions, the number of RRGs—now about 220—could increase. "For example, medical professional liability (MPL) RRGs proliferated during the hard markets of the early 2000s, when physicians and small practices had difficulty getting affordable" MPL coverages, the report noted.

On the other hand, the volume—while still small—of some risks funded through captives has soared. For example, Best estimates that at least 29 captives wrote cyber coverage last year, with premiums totaling $17.2 million, up from $14.8 million in 2017 and just $7.8 million in 2016. In all, 61,689 cyber policies provided through captives were in force last year, up from just under 57,000 in 2016.

"Cyber remains one of the fastest-growing lines of business, generating exceptional results for US captives, and the line will only continue to grow," the report noted.