Organizations globally face rising expectations from their stakeholders — including regulators, investors, rating agencies, customers, and employees — to implement environmental, social, and governance (ESG) programs and to be more transparent about their operations’ impact. However, a lack of standard ESG practices makes it difficult to know how to proceed. Because ESG is an enterprise-wide journey, organizations should consider how captive insurance entities — a tool that many already possess — can support their ESG strategy.
A captive insurance company is a licensed insurer or reinsurer owned by a noninsurance company that insures or reinsures the risks of its parent and/or affiliated companies. Organizations that form captives often also purchase insurance from the broader markets to protect from catastrophic and other risks, according to their unique strategy. Captives are an increasingly popular mechanism to help insulate organizations from volatility in the commercial insurance market, while providing a flexible means to manage risk.
Each letter in ESG reflects risks and opportunities that will vary for every organization. Wherever an organization may be on its journey, a captive can provide valuable help, offering proven solutions to reduce risk and support all aspects of ESG, including:
Environmental aspects include minimizing impact on the environment, monitoring and reducing energy emissions, reducing waste through better resource management, and using green technology. The transition to a low-carbon economy is changing the risk appetites of commercial insurers. These changes are already resulting in reduced capacity for certain business activities. Captives can address coverage gaps, exclusions, climate-related perils, renewable energy assets, and more.
The social aspects of ESG include an organization’s relationships with its employees, customers, suppliers, and the community. Health and safety standards and employee benefit programs are two areas where organizations can address social impact. Captives can help harmonize benefits for multinational corporations; fund programs for employee engagement, health, and safety; and support diversity, equity, and inclusion (DEI) programs.
Good governance is essentially an affirmative response to the question, “Do we run our business effectively?” Aspects of governance include effective risk management and compliance, ethical standards, greater board diversity, and disclosure. The existence of a captive can be seen as “proof” of governance through formalized risk funding and reporting in a licensed, regulated, legal entity.
Because captives themselves have boards and investable assets, they can reflect and augment their parents’ ESG strategies. Consider the case of a national specialty retailer that was looking to enhance its ESG profile. The company already had a strong commitment to making a positive impact on society and the environment, but was unsure how its captive could play a role in that effort until it realized the impact captives have on corporate governance. As a regulated insurance entity, a captive promotes active risk management and provides active oversight and control, offering the parent a structured way to make informed decisions about risk.
Captives not only enhance the risk profile of their parents to commercial insurers, but they also provide a natural risk management forum for organizations’ risk management, legal, finance, accounting, human resources, and internal audit teams.
When parent organizations include their captives in ESG programs, benefits may include:
Captives can generate substantial surplus capital from their underwriting operations, which their parents can use to support green investments. In 2021, Marsh-managed captives reported more than US$110 billion in surplus.
Captives can help reduce total cost of risk, which enhances sustainability. Captives also can prevent the erosion of profitability, thereby preserving the opportunity to support ESG programs for the long term.
Organizations can tap their captive surplus to fund innovation. For example, one health system established an in-house innovation lab, seeking ideas from front line employees.
The result included new programs which reduced medical costs and benefitted employees, the organization, and patients.
Organizations with captives can take several steps to integrate them into ESG programs, including: