European Captives Show Robust Underwriting Performance

AM Best's European captive ratings have been stable through the past year, with all the ratings affirmed and stable outlooks maintained.

Typically, European captives fulfill the majority of their parent organization's insurance needs, with relatively little primary cover placed outside the captive, according to AM Best. At the same time, the question of how captive insurers could benefit from innovation is increasingly a board-level concern.

A new Best's Market Segment Report, "European Captives 2019—Building Block Rating Considerations," discusses the key rating considerations as they apply to the European captives rated by AM Best, providing details of the captives' balance sheet strength, operating performance, business profile, and enterprise risk management and any rating lift or drag from the wider group.

Balance sheet strength is viewed as the foundation for financial security, and its evaluation is critical in determining an insurer's ability to meet its current and ongoing obligations, AM Best said. All the European captives currently rated by AM Best have balance sheet strength assessments of very strong, which is typically underpinned by the strongest level of risk-adjusted capitalization. In addition, most of the rated European captives benefit from strong operating performance.

Mathilde Jakobsen, director with AM Best, said, "The robust underwriting performance of single-parent captives is underpinned by their extensive and detailed knowledge of the portfolios they cover, which supports adequate pricing. Therefore, if achieving an underwriting profit fits with their strategic aims, the captives typically achieve the metrics required for a strong operating performance assessment."

The report also notes that the majority of captives do not currently see innovation as a major growth driver but that most now consider how innovation could be used to achieve efficiencies in their daily operations, create new revenue streams, or more generally enhance the use and value of the captive insurance company to the parent organization.

Konstantin Langowski, financial analyst with AM Best, said, "AM Best believes that innovation is a dynamic and ongoing long-term process that can take many forms and is not limited to a specific type of innovation or technological development. Captives are in a unique position to benefit from the close relationship and integration with their parent organizations, as they have access to potentially very detailed and unrivaled data sources, which could be used for big data analytics or to foster agile new coverage development."

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