US Captive Insurance Market Sees Strong Growth, Outperforms Commercial Peers

US captive insurance companies rated by A.M. Best experienced another year of significant growth in 2023, reporting a 53 percent increase in net income, according to a recent report. These captives not only saw surplus gains but also continued to outpace their counterparts in the commercial insurance market.

The A.M. Best report, titled "Growing Captive Insurance Market Highlights Risk Management Expertise," reveals that the population of A.M. Best-rated US captives posted a collective net income of $1.4 billion, up from $923 million in the previous year. Despite some volatility leading to a 10.2 percentage point deterioration in their combined ratio to 91.1 in 2023, these captive insurers still maintained a 5-year average combined ratio of 86.5, outperforming the 97.5 average of their commercial casualty peers.

Between 2019 and 2023, US captives added $4.3 billion to their year-end surplus and returned $2 billion in dividends to stockholders and policyholders. This represents $6.3 billion in insurance cost savings, as these captive insurance companies retained funds that would otherwise have been spent on commercial coverage.

"Although captives are not created with the intention of being profit centers for their organizations, they are highly profitable," said Dan Teclaw, director at A.M. Best. "Unlike some of their peers in the commercial market, captives have not been materially impacted by the higher frequency or severity of weather and natural catastrophes in the past 5 years."

The report also notes a rise in the number of US captives as the hard market persists. Captive owners have increasingly customized business interruption coverage since the pandemic to ensure predictability in the event of future disruptions. Group medical stop-loss has emerged as a rapidly growing coverage, driven by rising medical costs and inflation. Additionally, the cyber-insurance market has stabilized, but rising prices have led captive owners to consider offering higher limits. Other risks covered by captives include directors and officers, professional liability, product liability, and surety bonds.

"In a hard market, owners often broaden the use of their captives to cover nontraditional risks or replace coverage with unfavorable terms," Mr. Teclaw said. "Captives and other alternative risk transfer entities provide an effective option for policyholders' enterprise risk management needs during challenging commercial market conditions."

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