Captives: A key to unlocking sustainability goals

In today’s fast-changing risk landscape, sustainability is emerging as a key driver for both business opportunities and risk. Whether its extreme weather events, the challenges of decarbonisation, or privacy concerns from artificial intelligence, businesses everywhere face a wide array of sustainability-related risks and challenges.

For risk managers, the task of integrating sustainability considerations into risk management strategies is more important than ever. A recent survey of risk managers found that more than half (57%) say they are involved in assessing environmental, social, and governance (ESG)-related risks, while 54% are either responsible for, or are closely involved with, their organisation’s sustainable development.

In this context, captive insurers are set to play a vital role in the sustainability story. As a formalised form of self-insurance, a captive typically manages its owners’ risks by offering tailored insurance and reinsurance solutions. However, by serving as a core component of its parent company’s risk strategy, a captive can also help to address sustainability-related risks.

Key risk driver

Take climate change-related risks. Captives are already helping companies adapt to more frequent and severe extreme weather events, such as severe thunderstorms, hailstorms and floods, where insurance capacity may become more limited for certain locations (almost three quarters of risk managers cite natural disasters as the risk most likely to become harder to insure in the future). However, captives can provide an alternative to traditional insurance for difficult-to-insure perils, especially when combined with data analytics, loss prevention measures, and innovative solutions like parametric triggers.

On the flip side, captives are also supporting the energy transition. New and emerging risks, such as those posed by emerging green technologies and electrification, can be difficult for underwriters to assess and price. Captives, however, can act as incubators - to collect quality risk and loss data, establish risk management controls, and build experience of insuring novel technologies, such as battery storage, offshore wind turbines, and green hydrogen. Over time, by sharing insights, a commercial insurance market for such risks can be created and expanded.

Resilient workforces

More and more captives are now writing employee benefits, including life insurance, health, and disability covers, which can help businesses attract and retain diverse talent, enhance employee engagement, and adapt to changing workplace risks. Captives also give their owners the flexibility to provide employees with additional benefits, such as cover for fertility treatments or pre-existing conditions, gender dysphoria coverage, mental health support, and wellbeing services.

Captives can also contribute to building more resilient societies and supply chains. They are already being used to provide micro-insurance products, which can increase access to protection for people and small businesses in low-income areas. Captives are also helping organisations manage sustainability risks related to geopolitical and geo-economic impacts, such as supply chain disruption and asset protection in parts of the world exposed to heightened credit and political risks.

From a governance perspective, captives can help protect organisations against ESG related liability risks, such as accusations of greenwashing for directors and officers (D&O), climate change litigation, or environmental liability exposures. A growing number of captives are writing cyber insurance cover, and can help organisations address the changing regulatory environment in areas like ransomware, data privacy, biometrics, and artificial intelligence.

Bright captive future

In a world of difficult-to-insure risks, the value of captives has never been higher. The captive market is expanding, in terms of new captives, new domiciles, and new lines of business. According to E&Y’s 2024 Global Insurance Outlook Report, captives now represent nearly 25% of the overall commercial insurance market. Marsh’s Captive Benchmarking report revealed that captive premiums managed by the broker increased by almost 50% between 2018 and 2023 (from $49bn in 2018 to $73bn in 2023), with property premiums alone up by 29% in 2023.

Captive insurers are now considered a well-established solution for financing any risks, rather than just a solution for when commercial insurance options are exhausted. According to the recently published Spotlight on Captives report, many captives are now used as a strategic risk management tool, helping their organisations deal with an uncertain global risk landscape, addressing risks and opportunities as varied as climate change, cyber, microinsurance, and employee benefits.

While captives face a bright future, developments in the regulatory sphere are on the horizon. As part of the EU’s Corporate Sustainability Reporting Directive (CSRD), the European Financial Reporting Advisory Group has developed sustainability reporting standards for captive insurers and reinsurers, which are due to be introduced in January 2026, but with a two-year optional opt-out. Revisions to the EU’s Solvency II Directive - expected to be in place by the end of 2024 – will address the proportionality of reporting requirements for small and non-complex insurance undertakings, including the assessment of sustainability risks.

Aligning sustainability and captive strategies

As a significant driver of risk, sustainability-related trends impact an organisations strategy and exposures, including those potentially written by captives. While traditional risk management and insurance programs can help address many sustainability-related risks, captive insurance solutions offer alternative and innovative ways to better manage and finance risks in this area.

To this end, companies can align their captive risk financing and investment strategies with the parent company’s sustainability goals and standards. Risk managers can consider carrying out a sustainability materiality assessment, identifying associated risks and opportunities, and mapping these against the captive strategy and risk appetite. They can then look to align captive policies with sustainability objectives, such as including environmental impact assessments in underwriting processes, or integrating social factors such as labour practices into coverage terms.

This approach ensures consistency across the organisation’s risk management strategies, and supports a culture of sustainability. Board-to-board engagement, however, is essential for the captive board to understand and align with the parent company’s sustainability strategy. This ensures that the captive is fully aware of the parent company’s risk appetite and sustainability targets, and can make informed decisions about risk financing, coverage structure, and investment strategy. The role of captives evolves over time, adapting to emerging risk challenges. As sustainability concerns grow, utilizing a captive to support company goals can drive impactful results.

Originally published in Commercial Risk on November 20, 2024.