Captives are performing far better than “commercial line insurers”, according to an AM Best report, and the ratings company expects the trend to continue.

Over the past five years, captive insurers have retained almost $10 billion that otherwise may have gone to commercial players.

The report, which is titled Feasibility and Utility Sustain Rated Captives’ Excellent Profitability and dated August 3, details the hardening market that led to the conditions favourable to the growth of captives.

It recounts catastrophes starting with wildfires in 2017 and continuing with the arrival of Covid-19, as well as supply-chain issues, inflation, higher repair costs, higher property claims and increasing expenses related to defending claims.

“These conditions have made the environment beneficial for captive insurance,” the report said.

AM best noted that captives have not only been successful managing risk but have been able to do so over a long period of time. It also notes that the benefits of captives have become more available to smaller enterprises in recent years, especially through group captives, risk retention groups and cell facilities.

One of the fastest growing subcategories is RRGs related to group medical stop-loss coverage. This trend is linked to the rising cost of health insurance in the US and the desire to take control of these risks and bring them in-house.

Oldwick, New Jersey-based AM Best has noted growth in terms of the number of captives, rising from 3,133 in the US in 2019 to 3,328 in 2022, and finds a number of states particularly successful in attracting new business: North Carolina, Hawaii, South Carolina and Arizona.

Between 2019 and 2022, the number of captives in North Carolina has increased 25.1 per cent, and in Arizona 26.6 per cent.

Of the global captives rated by AM Best, 16.7 per cent are in Vermont, 3.2 per cent in Texas and 39.8 per cent in other US jurisdictions.

Bermuda captives are 10.6 per cent of the total rated by Best, Barbados 6.0 per cent and Cayman Islands 3.7 per cent.

In the report, AM Best did note some trouble captives appear to be facing.

Volatility in equity markets and rising interest rates have left even those with the most conservative investment policies taking unrealised losses.

In some cases, this has prevented them from repatriating excess capital back to their parents in order to maintain their strong capitalisation.

Owing in part to poor investment results, the dividend ratio for US captives dropped ten points in 2022 to 4.9 per cent, the lowest since 2018.

“Driving the reduction in dividends were the lacklustre investment results in 2022, which resulted in sizeable unrealised capital losses that translated into pressure on surpluses,” the report noted.

AM Best also highlighted a dramatic increase in premiums written in 2022. Direct written premiums were up about 21 per cent that year, and net premiums written increased 27.2 per cent.

It said that captive premium growth has historically been slow, at a compounded rate of about 2 per cent a year.

“Lower premium growth has long been a feature of captives, as these companies have more control managing and monitoring their risk and setting actuarial pricing,” the report says.

It added that inflationary pressures and the hardening of the market drove the dramatic increase of premiums in 2022.