AM Best-rated U.S. captive insurers post $1.4bn net income in 2023

AM Best-rated U.S. captive insurers experienced a strong year in 2023, posting a net income of $1.4 billion, a 53% increase from the $923 million figure that was posted in the prior year.

At the same time, 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, AM Best noted.

However, year-over-year, the U.S. captive composite did witness some volatility, which ultimately led to a 10.2-percentage point deterioration on their combined ratio to 91.1% in 2023.

It’s important to highlight, that between 2019 and 2023, the U.S. captive insurers managed to add $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 businesses by not purchasing coverage from the commercial lines market.

According to AM Best, the number of U.S. captives are continuing to rise amid the persisting hard market.

Since the COVID-19 pandemic, business interruption has been customised by captive owners to ensure they have some predictable coverage should a future event as damaging as that were to emerge again.

One key factor to note, is that 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.

As well as this, AM Best states that the cyber market has generally stabilized, though not softened, however rapidly escalating pricing has prompted captive owners to contemplate offering higher limits.

Dan Teclaw, director, 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 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.”

Adding: “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. 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.”

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