Captives continue to show strong growth: A.M. Best

Over the five-years ending 2003, captives posted net written prmeiums growth of 45%, according to a new report by A.M. Best. In its annual captives review, the rating agency finds over the same five-year period, admitted assets are up 29%, testament to the importance captives are playing in the international risk transfer market.
However, captives appear to be taking on greater underwriting risk at the cost of increasing leverage, the report notes. While reserves grew by 35% over the five years, surplus was up just 2%.
The study includes 159 captive insurers who file statutory financial statements with the rater 126 of which are actually rated for financial strength.
The report notes that while the hard market has contributed to captive growth, it also presents challenges in terms of fronting availability, cost and control. Many captives increased premium rates to better reflect loss and reinsurance costs, as well as re-underwriting accounts with tighter standards, and turning away applicants to group captives who might weaken the overall program.
“Both as observed in the special report’s financial results and in anecdotal evidence gathered during the interactive rating process with A.M. Best-rated captives, managements have focused on program credibility and return value to the parent,” the report notes. “They aim for critical mass to ensure an adequate spread of risk while not burdening parent organizations with such onerous capital needs as to affect the operations of the parents themselves.”
A.M. Best expects this kind of focus to continue, although some accounts may find retentions can be reduced as market conditions soften. It remains to be seen how captives may need to respond with lower rates or product enhancements given the length and depth of the coming soft market and its impact on commercial rates.