US captives see 21% income decrease
209 US captives saw a net income decrease of $537m or 21% in 2011. This was due to decreases in underwriting income, net investment income and realised capital gains.
Decreases in net income, such as increases in other expenses and income taxes, a soft market and continuing global financial malaise have also been cited for the loss in profits, reports AM Best.
Underwriting income for 2011 decreased because of increases in loss and loss adjustment expenses incurred ($318m or 6%) and underwriting expenses incurred ($129 m or 8%).
This is somewhat counterbalanced by a decrease in dividends to policyholder and owners of $129m, or 29%, and an increase in net earned premiums of $59m or 1%.
However, AM Best’s report shows that of its rated captives, single-parent captives outperform commercial insurers in profitability by “substantial and impressive margins”.
AM Best’s results show only pure captive policyholder dividends appear to be unfavourable in comparison to commercial insurers. But these are in fact favourable, as it is paid to the parent.
There are a number of reasons for the differences in operating performance measures.
Starting with the loss and loss adjustment expenses ratio, single-parent captives significantly outperform the commercial lines industry by a wide margin.
This is due to lower frequency and severity of losses, as well as significantly lower claims mitigation costs of losses that do occur in captives.
Losses are generally of lower frequency because of customised and proactive risk mitigation that are designed for the individual parent companies.
AM Best said: “Commercial lines companies of any size struggle to create a loss information feedback loop that works as well as those employed by most single-parent captives.”