US captive insurance companies reported another strong year in 2023, continuing to outperform their commercial market peers, according to AM Best.
The special report ‘Growing captive insurance market highlights risk management expertise’ states that US captives posted net income of US$1.4 billion in 2023, up from US$923 million in the previous year.
Additionally, the five-year average combined ratio of 86.5 for the AM Best-rated US captives outstripped the 97.5 of their commercial casualty peer composite.
Between 2019 and 2023, US captives added US$4.3 billion to their year-end surplus while returning US$2 billion in stockholder and policyholder dividends, representing US$6.3 billion in insurance cost savings that the captives retained for their own organisations by not purchasing coverage from the commercial lines market.
Dan Teclaw, director of AM Best, notes: “Although captives are not created with the intention of being profit centres for their organisations, they are highly profitable.
“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 five years. Barring any unforeseen systemic catastrophic events, we expect captives’ results to be favourable again in 2024.”
According to the report, the number of US captives continues to rise amid the persisting difficult market. Since the pandemic, captive owners have frequently customised business interruption coverage to ensure they have predictable coverage should a future event emerge.
At the same time, group medical stop-loss has emerged as one of the fastest growing coverages considered by captives due to increased medical inflation and the continued rise in health care-related insurance costs.
In addition, the rapidly escalating pricing in the cyber market has prompted captive owners to contemplate offering higher limits. Other potential risks and lines captives are being utilised for include directors and officers, professional liability, product liability and surety bonds.
Teclaw observes: “In a hard market, owners-sponsors often broaden the use of their captives to provide coverage for non-traditional risks, or they may replace all or a portion of coverage offered with unfavourable terms, such as workers’ compensation, general liability, or auto.
"Captives and other alternative risk transfer-type entities can also provide an effective and efficient option to support a policyholder's enterprise risk management coverage requirements during difficult commercial market conditions."
