US captive insurance firms continue to outpace commercial market peers: AM Best

According to AM Best, the longstanding factors behind the captive composite’s outperformance of the broader commercial lines market remain intact, namely, effective claims and risk management, strict control over operating costs, and a disciplined, targeted underwriting approach.

AM Best noted that rated U.S. captive insurance companies reported another strong year in 2024 and continued to outpace their commercial market peers despite a 14% drop in net income.

The rating agency noted that U.S. captives in this peer group posted net income of $1.3 billion in 2024, down from $1.5 billion in 2023, which saw a 51% surge over the year before.

At the same time, the five-year average combined ratio of 88% for the AM Best-rated U.S. captives reportedly outperforms the 97% of their commercial casualty peer composite.

As mentioned, the rating agency has noted that historical drivers of the captive composite’s outperformance of the broader commercial lines market remain unchanged and include the captives’ efficiency in managing claims and mitigating risk, their ability to control operating costs and their focused approach to underwriting.

“Additionally, as strategic extensions of owners’ enterprise risk management functions and as self-insurance vehicles, captives are incentivised to focus on loss control and the preservation of capital, as opposed to chasing profitability and higher rates of return,” AM Best added.

Dan Teclaw, director, AM Best, commented, “There continues to be a noticeable increase in the adoption of captive insurance solutions by owners, sponsors and managers, although the pace of formations has slowed some as the hard market has gradually abated in certain lines of business, such as D&O or cyber.

“However, overall usage of captives for new lines or coverages such as employee benefit risks or parametric contracts is still expanding, reflected by sustained year-over-year increases in premiums.”

Teclaw added, “When risks appear overpriced or unavailable at the terms and conditions a company may need, captives have the flexibility to step in and customise if they have appropriate capital support.

“Although captives are not created with the intention of being profit centres for their organisations, they remain highly profitable, and AM Best would expect captives’ results will continue to be favourable in 2025.”