Hard market to prompt captive growth

Firming commercial insurance prices and impacts from the COVID-19 pandemic could present opportunities for the captive insurance segment to increase its footprint in several lines of business, according to AM Best.

Focusing on the US captive market, the rating agency noted that captive insurers had continued their run of strong financial results in 2019, with pretax operating income of $918m. Although this was down 16% from the $1.1 billion in earnings reported in 2018, the segment remained extremely profitable, and once again outperformed its commercial market counterparts.

The captive composite’s most recent five-year period average combined ratio (after policyholder dividends) of 92.0% compares favorably with the 100.8% posted by the commercial casualty composite.

Additionally, between 2015 and 2019, captives added $3.8 billion to their year-end surplus and returned $4.4 billion in stockholder and policyholder dividends, representing $8.2 billion in insurance cost savings that captives retained for their own organisations by not purchasing coverage from third parties in the commercial market.

”For captive insurers, COVID-19 brings forth not only a new set of challenges but also new opportunities, particularly for insureds seeking to include coverages for communicable diseases as part of their commercial property policies, including business interruption and contingent business interruption,” states Best. ”Few if any commercial carriers are currently offering this coverage – this, in and of itself, presents a huge opportunity for captives and their insureds.”