Best’s Market Segment Report: U.S. Insurance Takes Action Amid Capacity and Pricing Challenges

ALDUICK, NJ-(BUSINESS WIRE)–The U.S. life insurance market segment continued to generate earnings and excess earnings in 2021, while outperforming its commercial market rivals, according to a new AM Best report.

The Best Special Report, “U.S. Captive Insurance: Entry Amid Capacity and Pricing Challenges,” stated that AM’s top-rated U.S. captives reported another strong year with pretax operating income of $1.0 billion , which is a modest decline from the $1.1 billion reported in 2021. Additionally, a five-year average combined ratio of 84.5 posted by AM’s top rated US captives significantly exceeded their combined ratio of 99.4 commercial victims. Year over year, these US closed companies recorded a 1.8 percentage point improvement in their combined ratio to 85.4 in 2021. Overall, between 2017 and 2021, they added $4.3 billion to their trailing surplus of the year, while returning $5.8 billion in dividends to shareholders and policyholders, representing $10.1 billion in insurance cost savings that captives retained for their own organizations by not purchasing third-party coverage on the commercial market.

“The inherent flexibility and control in risk management of the underwriting segment drives profitability and preserves profits while creating value for policyholders and stakeholders regardless of market conditions,” said Dan Tecklow, Associate Director, AM Best.

Investment returns remain a challenge for US rated insurers. In 2021, net investment returns rose slightly, which combined with higher capital gains increased investment returns to 4.1% from 3.9%.

Net investment income remains a strong driver of operating earnings despite weak returns from growing investment portfolios.

According to the report, the number of captives in the U.S. continues to rise, although growth in captive formations has been tempered by the onset of economic uncertainty resulting from the pandemic, as well as continued scrutiny by the IRS and greater regulatory and reporting requirements. However, these conditions have prompted insurers to explore the alternative and flexible solutions that prisons can provide.

“Difficult retail market conditions highlight the advantages of the proprietary segment and provide businesses with an incentive to establish them,” said Fred Eslami, Associate Director, AM Best. “In tight markets, some non-insurance companies may feel that the commercial market doesn’t understand or overestimate their view of their own risks, so they investigate forming captives.” This current environment allows captives to customize coverage for risks that may be unusual or difficult to write or place in the standard market.”

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