Best’s Market Segment Report: Growing US Captive Insurance Market Highlights Risk Management Expertise

AM Best-rated U.S. captive insurance companies reported another strong year in 2023, generating a 53% increase in net income with surplus gains while continuing to outperform their commercial market peers, according to a new AM Best report.

The Best’s Special Report, “Growing Captive Insurance Market Highlights Risk Management Expertise,” states that the population of AM Best-rated U.S. captives posted net income of $1.4 billion, up from $923 million in the previous year. Additionally, the five-year average combined ratio of 86.5 for the AM Best-rated U.S. captives outstripped the 97.5 of their commercial casualty peer composite. Year over year, the U.S. captive composite did see some volatility, which led to a 10.2-percentage point deterioration on their combined ratio to 91.1 in 2023. However, between 2019 and 2023, they added $4.3 billion to their year-end surplus while returning $2.0 billion in stockholder and policyholder dividends, representing $6.3 billion in insurance cost savings that the captives retained for their own organizations by not purchasing coverage from the commercial lines market.

“Although captives are not created with the intention of being profit centers for their organizations, they are highly profitable,” said Dan Teclaw, director, AM 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 five years. Barring any unforeseen systemic catastrophic events, we expect captives’ results to be favorable again in 2024.”

According to the report, the number of U.S. captives continues to rise amid the persisting hard market. Since the pandemic, business interruption has frequently been customized by captive owners to ensure they have some 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. Additionally, the cyber market has generally stabilized, though not softened, but rapidly escalating pricing has prompted captive owners to contemplate offering higher limits. Other potential risks and lines captives are being utilized for include directors and officers, professional liability, product liability and surety bonds.

“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 unfavorable terms, such as workers’ compensation, general liability or auto,” said Teclaw. “Captives and other alternative risk transfer-type entities can also offer an effective and efficient option to support a policyholder’s ERM coverage requirements in periods of difficult commercial market conditions.”

To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=345369.

AM Best will host a market briefing on the state of the captive insurance industry today (Wednesday), Aug. 7, 2024, at 2:00 p.m. (EDT). Please visit the briefing page to register for the event.

AM Best remains the leading rating agency of alternative risk transfer entities, with more than 200 such vehicles rated in the United States and throughout the world. For current Best’s Credit Ratings and independent data on the captive and alternative risk transfer insurance market, please visit www.ambest.com/captive.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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