Favorable investment returns and improved underwriting discipline helped the U.S. captive insurance sector improve profitability in 2010, a new report from
The 194 U.S. captive insurance entities followed by A.M. Best in 2010 charted a collective 49% increase in profitability over the prior year, while policyholder dividends were up 73%.
The primary driver was a boost in investment income. “Overall, there has been a substantial recovery in invested asset values that has brought most captives back to pre-crisis levels,” the report states. “Between realized and unrealized appreciation over the past two years, these rated captives have recovered more than 90% of the write downs from 2008 and the first quarter of 2009.
Despite the lingering soft market, A.M. Best says better underwriting discipline was also a major factor in the sector’s performance. “Underwriting income increased as captives showed underwriting discipline that resulted in significant declines in premium,” the report states. “Higher realized capital gains allowed some decreases in rates for profitable accounts as some captives sought to compete in the continuing soft market. But overall, captives seemed to be holding the line on pricing while returning significant policyholder dividends to bolster retention rates.”
The report says given the specialized nature of the captive insurance, captives need to focus on enterprise risk management (ERM) practices, especially concerning certain risk retention groups (RRGs). “Mitigating correlation risk is difficult, as members usually have narrowly focused insurance needs. For instance, medical professional liability insurance RRGs often are limited by type of medical practice (such as podiatry, ophthalmology), which may result in multiple-case, practice-related claims.”
Nonetheless, the report says captive insurers enjoy some advantages compared standard-market companies. “As the soft market continues and competition intensifies, insureds have more options in terms of pricing. One advantage for captive insurers is the ability to compete not only on price but with customized policies and services for their insureds, as well as stable insurance capacity,” the reports states.
