AM’s top-rated U.S. captive insurers had a strong year in 2023, reporting net income of $1.4 billion, up 53% from the previous year’s figure of $923 million.
At the same time, the five-year average combined loss ratio of U.S. captives rated by AM Best of 86.5% exceeded their comparable commercial liability insurance rate of 97.5%, AM Best found.
However, there was some year-on-year volatility in the US captive group, ultimately leading to a deterioration in the combined loss ratio by 10.2 percentage points to 91.1% in 2023.
It is important to highlight that between 2019 and 2023, U.S. captive insurers managed to increase their net income by $4.3 billion while paying out $2.0 billion in dividends to shareholders and policyholders. This represents a cost saving of $6.3 billion that the captives kept for their own business by not purchasing coverage in the commercial insurance market.
According to AM Best, the number of US captives continues to rise in view of the ongoing difficult market.
Since the Covid-19 pandemic, captive owners have customized business interruption insurance policies to ensure they have some predictable coverage should such a destructive event occur again in the future.
An important factor is that group health insurance stop-loss insurance has become one of the fastest growing coverages for captives due to increased medical inflation and the continued increase in health-related insurance costs.
In addition, AM Best states that the cyber market in general has stabilized, although not weakened, but rapidly rising prices have prompted captive owners to consider providing higher limits.
Dan Teclaw, Director of AM Best, commented: “Although captives are not created with the intention of being profit centers for their organizations, they are highly profitable. Unlike some of their competitors in the commercial market, captives have not been significantly impacted by the increased frequency or severity of weather and natural disasters over the past five years. Barring unforeseen systemic catastrophic events, we expect captives’ results to return to positive in 2024.”
And further: “In a difficult market environment, owner-sponsors often expand the use of their captives to provide coverage for non-traditional risks or replace all or part of the coverage offered on unfavorable terms, such as workers’ compensation, general liability or auto insurance. Captives and other alternative risk transfer companies can also provide an effective and efficient option to support a policyholder’s ERM coverage needs during times of difficult market conditions.”
