Although reduced medical malpractice business led to a 15 percent drop in net premiums written by captive insurers between 2006 and 2007, overall their operations benefited from favorable underwriting trends, according to A.M. Best. A.M. Best analysts told National Underwriter that risk managers have become much more sophisticated in their use of captives. They are holding onto their captives, even during a market when rates are down almost across the board. In fact, captives are thriving despite the market, said A.M. Best analyst John Andre. In its special report, “Medical Malpractice Leads Captives’ Premium,” A.M. Best Co. found that:
- Declining premium volume suggests future weakening in captives’ performance, but these companies generally are insulated from sudden, major underwriting losses.
- Captives’ positive results in recent years are igniting competition as traditional insurers encroach on areas that have more flexible pricing in an effort to lessen the soft market’s impact.
- Net premiums written fell 26 percent in medical malpractice, the largest line with nearly one-third of the business for the 177 captives in the special report.
- Solid underwriting results in medical malpractice helped the captive composite’s loss ratio to improve substantially in 2007 to 61.9.
- Despite increases in the expense ratio and policyholder dividends, the combined ratio improved to 92.3, based on the excellent loss ratio.
- The captive composite’s favorable underwriting trends contrasted with a slight deterioration for the overall property-casualty industry.
- Captives’ net income dropped in 2007, as realized capital gains fell from the exceptional level of 2006.
- Like the p-c industry as a whole, captives were impacted by the soft market and the stunted growth of exposures in the current economy.
- Captives have benefited from stable or reduced reinsurance rates, which have allowed companies to increase limits on excess layers.
- Proposals by the IRS last year would have restricted the tax deductibility of loss reserves paid to captives, but concentrated lobbying by industry representatives prompted the IRS to withdraw the proposal.
A.M. Best said its outlook for the captive industry is stable.