03 August 2017
Reporter: Becky Butcher

Captives continue to play ‘vital role’ globally

US captives ended 2016 on “strong form” as pre-tax profits rocketed and underwriting results reflected a relatively benign year for catastrophes.

A.M. Best’s special report on US captives revealed that captive revenue still accounts for less than 10 percent of the estimated global commercial market of $800 billion, but they have become an “integral and well established part of the market”.

According to the rating agency, its captive insurance composite ended 2016 in “strong form” with pre-tax profits up more than 15.8 percent to $1.6 billion. The total figure included more than $803 million in underwriting profit, of which $491 million was related to favourable prior year reserve development.

“Exceptional” underwriting results also helped the sector post strong pre-tax operating earnings, which reached a new high in 2016, because of strong attritional results and another year of relatively “benign catastrophes”, whether natural or man-made.

“We believe these results are in part a reflection of the close alignment of interests and strong risk management, safety, and loss control functions,” A.M. Best’s report said.

In 2016, captive premiums increased “modestly” by 3.2 percent, reversing the slight declines of recent years. Last year, premium growth was largely due to increases in medical professional liability and commercial multi-peril.

Also contributing to the increase in net premiums were moves by several rated single-parent captives to take on more risk premium, raise deductibles, or change reinsurance.

“In most cases, these were existing lines for which the captive was comfortable taking on a greater portion of this risk. Pricing and availability in the commercial sector sometimes play a role in the captive owners’ decision-making.”

“At other times, the captive will look to take on a new product, like medical stop-loss or cyber, which may, however, be heavily reinsured in the first few years—as the new product incubates, more of the net risk is brought into the captive.”

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