Rated U.S. captive insurers continue to outperform the broader commercial insurance market, and as several business lines see hardening rates, company boards are undoubtedly looking at captives as part of their risk management strategy, ratings agency A.M. Best Co. Inc. said in a report issued Monday.
This trend is particularly apparent in health care, “as companies look to captives to help them improve the overall health of their workers and reduce medical costs,” according to the report issued by the Oldwick, New Jersey-based Best.
Captives rated by Best reported a pretax profit of around $1.1 billion in 2019, down 16% from the $1.3 billion in 2017, as hurricanes Michael and Florence and the California wildfires likely played a “material role” in the muted results, Best said in the report, Rated Captives Continue to Build Upon Strengths.
The captive market remained profitable, however, continuing to outperform the commercial casualty composite, with a five-year combined ratio average of 88.8% compared with 99.9% posted by its commercial casualty counterparts, the report said.
In 2018, the captive insurance composite recorded a post-dividend combined ratio of 96.0% and a net underwriting profit of $160.0 million, Best said in the report.
Net premiums written increased by 4.4% in 2018, reversing the 6.7% decline reported the previous year and driven mainly by premium increases in medical professional liability and commercial multiperil insurance lines of business, said the report.
“These strong results are testament to the segment’s close alignment of interests with stakeholders and deeply ingrained risk management culture,” said the report.
Despite headwinds from low interest rates, changes in U.S. tax law and prolonged periods of soft market conditions, captive insurers remain nimble and stable, Best said.
Risk retention groups, accounting for 15% of Best’s composite premium, reported a combined ratio of 100.3%, a deterioration of nearly six percentage points, due to higher loss ratios and soft market pricing, according to the report.