A.M. Best: Med-Mal Leads Captives’ Premium Decline

July 28, 2008

Falling medical malpractice premiums led to a 15 percent drop in net premiums written between 2006 and 2007 for a composite of captive insurance companies, but captives overall benefited from favorable underwriting trends.

— Net premiums written fell 26 percent in medical malpractice, the largest line with nearly one-third of the business for the 177 captives in this A.M. Best Co. 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.

— Declining premium volumes suggest 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.

— 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’s outlook for the captive industry is stable.

Source: A.M. Best

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