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A new AM Best report indicates the operating performance of rated US captive insurers continued to surpass that of their commercial market peers in 2020, alongside emerging areas of growth, due to COVID-19-fueled market conditions.

Analysts explain how captives’ inherent flexibility and control in managing risk drives profitability and retain earnings while simultaneously creating value for policyholders and stakeholders, regardless of market conditions.

In 2020, AM Best-rated US captives reported another strong year, with a pretax operating income of $942 million, down modestly from the $1.01 billion reported in 2019, but still strong—particularly when compared with the results of the commercial casualty peer composite.

Additionally, analysts note how the five-year average combined ratio of 83.4 outstripped the 107.7 of their commercial counterparts by a wide margin.

Year over year, the AM Best-rated US captives recorded a 4.1-percentage point improvement on their combined ratio to 97.9 in 2020.

Overall, between 2016 and 2020, captives added $3.4 billion to their year-end surplus while returning $5.2 billion in stockholder and policyholder dividends, representing $8.6 billion in insurance cost savings that captives retained for their own organizations by not purchasing coverage from third parties in the commercial market.

With the hardened commercial insurance market and increased cost of reinsurance, captives are balancing risk appetites with self-insurance savings to determine whether or by how much to increase net retentions or to participate in the reinsurance tower to manage costs.

The report states that captives continue to explore coverages for employee benefits and medical stop loss, as well as in writing traditional lines of business where rates have climbed following catastrophe losses or those with ongoing uncertainty related to COVID-19; for example, directors and officers, errors and omissions and commercial auto liability insurance.

Overall, captive insurers remain nimble and stable despite persistently low interest rates and the recent turbulence in equities.

Captives also tend to stay away from alternative investment strategies despite the low interest rate environment.