Captives have an opportunity to drive innovation in ESG and insurance, according to Maria Arana, ESG leader Europe at Marsh, and Lorraine Stack, international sales and consulting leader at Marsh Captive Solutions.
Speaking on an episode of the Global Captive Podcast, Arana explained how ESG factors are beginning to influence underwriting decisions in the commercial market.
A Marsh underwriting survey of the London market in 2022 showed 40% of underwriters were already factoring ESG indicators into underwriting decisions, while 100% agreed that ESG factors will play a role in the process in the future.
Arana said while the Net Zero Insurance Alliance (NZIA) had been largely abandoned, she expected underwriters to continue to decarbonize their portfolios.
“We have observed three main characteristics,” she said. “Capacity withdrawals, obviously from high carbon intensity occupancies, but also capacity withdrawal from occupancies which are exposed to catastrophe phenomena which are exacerbated by climate change.”
On wordings, Arana said some of the restrictions concern liability related to litigation risks.
“Some of our energy clients will be looking at climate change risk exclusions on their liability policies if they are one of the energy clients that have a high carbon intensity,” she added.
On a more positive note, however, Arana said there is a strong desire to innovate and captives could have a role to play, especially on supporting the market when it comes to insuring the new technologies needed for energy transition.
“There is a strong interest from commercial insurers to increase their percentage of portfolio that refers to renewables, but they are very reluctant to take specific risks and in particular, technology risk,” she said.
Arana explained that the commercial market has not entered aggressively to insure new technological innovations, such as waste-to-fuel and hydrogen, and it remains more comfortable with “bread and butter” renewable risks.
Stack said she has seen Marsh-managed captives provide insurance support to the parent group on renewable energy projects such as wind farms and solar installations, while a risk retention group (RRG) in the United States is now writing conservation defence insurance.
On innovation, Arana and Stack said we are only beginning to see the start of what is possible, but captives can play a meaningful role in supporting the commercial market.
“From the market there is a very strong desire to invest in innovation when it comes to ESG,” Arana said.
“When it comes to climate, there are sentiments about insuring the transition, but there is an uncertainty in which direction to go and I think there is space for captives to give direction to the commercial market.”
Stack said captives can be used to produce tailored insurance products, providing coverage for new technologies, financing renewable energy products and green construction projects.
“There’s perhaps using the captive as a means of incentivizing behaviour across the firm,” she added.
“Providing insurance for subsidiaries with good carbon emission reduction programmes or emission offset programmes.”
Captive correlation
In March 2022, Marsh launched its ESG Risk Rating tool, a self-assessment that enables clients to measure their organisation’s ESG performance and understand their ESG risk profile from an insurance perspective.
“When we started the analysis we expected that companies with captives would have a higher ESG score because they’re more proactive in their risk management, and we expected to see a correlation with the Governance component more than anything,” Stack said.
“We did find that those companies owning captives had a higher ESG score and what we were surprised to find was that the strongest statistical significance was relating to the Social component.
“As someone who is very passionate about employee benefits, I’d hope that part of that is to do with the greater collaboration and harmonization between risk management and HR, but there’s probably other issues underlying that as well.
“Our research is at its beginning phases, there’s more to be done, but it certainly looks very promising.”
Outside of employee benefits, Stack said there are straight forward governance steps to be taken too.
The first would be to integrate ESG policies into the captive’s governance structure.
“At a minimum, this means ensuring that the board of directors are considering ESG during board meetings so its on the agenda,” she said.
“There are regulators, certainly in Europe that are pushing captives in this direction so it is important to do that.”
In the short term, this could extend to risk assessments and the implication of climate risk on underwriting portfolios, while ESG experts and consultants could be used to assess the captives’ ESG performance.
“Over the longer term, investing in ESG friendly assets and considering ESG linked insurance products for the group which could lead to linking products to ESG performance.”
Captive Intelligence has previously reported on captives signing up to the United Nations’ Principles for Sustainable Insurance (PSI), first Enel’s captive, followed by captives owned by Sonepar and International SOS.
Listen to the full GCP episode with Lorraine Stack and Maria Arana on the Captive Intelligence website here, or on any podcast app. Just search for ‘Global Captive Podcast’.