marsh
ESG, which stands for environmental, social, and governance, is essentially a framework to evaluate the impact of both the operations and output of an organization on people, prosperity, and the planet.
As regulatory bodies are applying pressure on companies to act on ESG, it is quickly becoming a compliance subject within the financial services sector. With this increasing focus, regulated insurance entities, including captives, can expect to see new climate and sustainability-related disclosure standards, along with requirements to monitor and stress test related risk exposures.
It has become clearer that captive regulators are planning to implement ESG frameworks for companies in their jurisdictions. In particular, Bermuda, Dublin, and Guernsey have started to define ESG standards and reporting requirements for captives. Although regulation will be implemented in domiciles around the world at differing rates, ESG is likely to crystalize as an important topic for all captive owners over time.
Regardless of industry or size, the mere existence of a captive demonstrates good governance because a captive is a formalized loss-funding vehicle. It is licensed by regulators and is a regulated legal entity, which has been established to protect the organization against risk.
In addition, a captive demonstrates impactful governance in the following ways:
– External stakeholders, such as insurance regulators, outside audit, actuarial pricing and loss reserve opinions, domicile legal counsel, captive manager, and investment manager.
– Internal stakeholders, such as captive board, risk manager, legal, finance/accounting, HR, and internal audit.
Captives offer organizations flexibility and control to address the people risks that impact their business, including employee benefits and employee engagement programs. Captives writing employee benefit risk can support the execution and delivery of a company’s diversity, equity, and inclusion (DEI) strategy and serve as a mechanism to:
The captive board itself can also be a mechanism to enhance DEI strategy for the group, providing opportunities for individuals from a variety of business areas to participate in key decision making for an important group subsidiary.
Many of the worlds’ largest insurers have committed to a net-zero position on investments and underwriting by 2050, with significant reductions by 2030. These commitments will inevitably have an impact on commercial insurers’ appetite and ability to underwrite carbon intensive risk. We are already seeing captives owned by parents in affected industries being utilized to address coverage gaps, exclusions, climate-related perils, third-party coverages, and renewables. We fully expect this trend to grow over time as carbon-intensive businesses transition to a low-carbon future.
In addition, alternative structures such as protected cell captives may be used for certain risks, and other transformative vehicles such as insurance-linked securities (ILS) may be used to access alternative capital to protect against climate risk.