Captives as an ESG tool
Captives can be used to address environmental, social and corporate governance (ESG) issues in the insurance market.
The final session of the 2022 Bermuda Captive Conference was a panel moderated by Séadna Kirwan, risk advisory director, Aon Bermuda and which included Sherman Taylor, head of capital markets, Bermuda, at Ocorian; Maura McGuigan, director of criteria at AM Best; and Andy MacFarlane, head of climate at AXA XL.
The session explored the possibility of captives covering uninsured risk in the ESG space, how parent company ESG initiatives could impact captive structure and operations, and Bermuda's responsibility in the ESG framework.
The panel agreed that this area is seeing rapid movement due to various initiatives by governments, boards of directors and other organisations, as well as by pressure from members of the public demanding change.
“ESG issues sometimes get dismissed by captives—people say ‘what can a captive do?’ on these issues,” Kirwan told Captive International at the conference. “But what we’re seeing now from our corporate clients is that every officer internally has been tasked with ‘what are you doing to help us with our ESG agenda’. So it’s a natural question to ask how the captive can help with that ESG agenda as well.
“There’s probably three or four ways to think of it. The first and probably the most well-trodden path is ‘what are we doing on the asset side of the balance sheet?’ We like to take a different approach to it, not just to invest in a green investment, but look at what you’re trying to offset. If you’re a heavy water utility company, your asset strategy should maybe be water offset credits. If you’re a heavy carbon company maybe you should be investing in carbon offsets. Not just a blanket ‘we’ll buy green funds’ from an investment company, but actually think about what you’re buying.”
According to Kirwan another issue is considering how you use a captive as the underwriter to really drive and reward sustainability behaviour of an organisation.
This can be simple things like if a company has a property roll-out and they’re rebuilding all their factories. The captive can provide an underwriting credit when that’s done, so they can reduce their premiums. Second, the captive can almost be used as a traditional carrier, putting money back into the system, as long as the system uses it from an ESG perspective.
“Another issue is that we all know that there is a huge insurance protection gap in the world,” Kirwan said. “Perhaps the captive can be used in such a way as to help with that gap? There are ways to creatively think about how you can deploy your capital in that way.”
