Printed from BusinessInsurance.com

Captive results outpace traditional insurance market

Posted On: Aug. 3, 2017 11:09 AM CST

The captive insurance market continues to remain “resilient, effective, efficient and profitable,” with rising premiums and lower combined ratios compared with the traditional insurance market as it further expands to cover evolving risks such as cyber liability, according to a new report by A.M. Best Co. Inc.

Best’s captive insurance composite ended 2016 with pretax profits up 15.8% over 2015 to $1.6 billion, including more than $803 million in underwriting profit, according to the report released by the Oldwick, New Jersey-based rating agency on Wednesday.

“Although captives are not intended to be profitmaking entities, their earnings are viewed as insurance expense savings that stakeholders would otherwise pass on to traditional commercial insurers,” the report stated.

In 2016, premiums increased modestly by 3.2%, reversing the slight declines of recent years, largely due to growth in medical professional liability and commercial multi-peril, according to the report.

Despite some catastrophe-related events in 2016, the captive insurance composite’s results outpaced the operating and underwriting results of the commercial casualty composite, with net premiums written, pre-tax operating income and policyholder surplus reaching all-time highs, according to the report. The captive insurance composite’s combined ratio improved from 86.9% in 2015 to 82.9% in 2016, while its five-year average combined ratio of 88.2% compares favorably with the commercial casualty composite’s 100.1% average over the same period.

“Although their mission is to break even, the CIC has had an excellent track record on profitability thus far and A.M. Best believes that, barring any unforeseen issues, results for the captive group should remain favorable in 2017,” the report said. “Some margin compression is inevitable owing to the prevailing low interest rate environment. However, captive insurers are not typically focused on high rates of return, but on loss control and capital preservation.”

Captives ensure availability and price stability and provide stakeholders with solutions and flexibility when emerging market issues such as cyber liability dictate enhanced coverage, according to the report. Direct premiums written by captives on cyber coverage rose 63.7% to $8.8 million in 2016, with paid losses of $1 million last year.

Meanwhile, the regulatory environment continues to evolve, with the New York State Department of Financial Services implementing both new and revised cybersecurity regulations, according to the report.

The governor of Vermont signed legislation this year to add agency captives — a reinsurance company owned by an insurance agency or brokerage — to the list of captives already allowed in that state.

“A.M. Best believes the inclusion of agency captives highlights the push by the insurance industry in recent years to get closer to their insureds,” the report said. “Many agents have long-standing relationships, with profitable books of business. Agency captives will allow them to continue to control that relationship by working with an unrelated primary carrier while sharing in the risk by participating in the fortunes of the business written.”

Some domiciles have enacted legislation that allows for dormancy status, giving the captive sponsor the ability to declare a captive dormant to save time and the costs of maintaining the captive, according to the report.

Recently, self-procurement taxes — taxes on premiums paid to non-admitted insurers — have played a major role in domicile selection, as one general interpretation of the Non-admitted and Reinsurance Reform Act — part of the Dodd-Frank Wall Street Reform and Consumer Protection Act — is that the entire tax is owed to the home state rather than being split among the states in which the risk is covered, the report noted.

“Accordingly, this interpretation provides an even greater incentive to have a captive domiciled in the home state, to avoid the entire self-procurement tax,” the report said. “With tax reform and a Dodd-Frank repeal being possibilities under the new administration, changes may very well be on the horizon. However, the House of Representatives’ proposed Financial CHOICE Act suggests no changes to the NRRA so for now self-procurement taxes will continue to play an important role in captive domicile selection.”

The number of captives in key North American domiciles grew by 4.4% in 2016, while both new formations and closings declined, according to a recent report from Strategic Risk Solutions cited by Best.

“Of particular note is the growth in North Carolina, which began licensing captives at the end of 2013,” the Best report said. “The state has been aggressive in implementing laws favorable to captives and is now the sixth largest domicile by number of total captives. States continue to enact captive-friendly bills in the hopes of their domicile being selected to help increase much needed revenue.”