This article was produced in partnership with Alternative Risk Management Limited (ARM)
Mia Wallace, of Insurance Business, sat down with Neil Brennan, finance and operations director at Alternative Risk Management Limited (ARM), to reveal how captives fit in to changing conversations around ESG.
In a recent feature with Insurance Business UK, Neil Brennan (pictured), finance and operations director at Alternative Risk Management Limited (ARM) pinpointed the opportunities facing those operating in the “fast-paced and increasingly evolving” captive space in 2023.
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With new and existing clients alike seeking out dynamic and creative solutions to their insurance procurement challenges, the adaptability and innovation inherent to the captive offering are only becoming more visible. In few areas of the insurance ecosystem is this quite as clear as across the evolution of ESG (Environmental, Social and Governance) initiatives – which, as highlighted by Brennan, has presented the captive space with a chance to shine.
Digging into the semantics of ESG, he highlighted that ESG is a recognition of the UN’s 17 SDGs (sustainable development goals) and, as such, frequently operates in tandem with corporate social responsibility (CSR) initiatives and diversity, equity & inclusion (DE&I) drives.
“Now, who doesn’t love the alphabet?” Brennan posited. “Seeing as how the V.P. is such a V.I.P., shouldn't we keep the P.C. on the Q.T.? 'Cause if it leaks to the V.C. he could end up M.I.A., and then we'd all be put on K.P.” – as so aptly if not quite concisely summarised by Adrian Cronauer (Robin Williams in Good Morning Vietnam).
“But, to put it briefly, the UN has set 17 Sustainable Development Goals (SDGs) to help work towards “a world of peace, dignity and prosperity on a healthy planet”. It’s clearly very worthwhile but a pretty intimidating agenda for one man and his captive to tackle. Standing back, however, you’ll soon realise that it’s not quite the “Here’s Johnny” moment that the first reading may have implied.”
ESG is not a legal requirement, he noted but rather an ideology that generally seeks to improve the value of your business. With this in mind captives, by their very nature, can be viewed as the flexible ‘sweeper’ for your business, either by necessity or desire.
With some insurers increasingly refusing to deal with certain types of cover, the question for captives is around the impact this is having across their marketplace. With the push towards a low carbon economy and more sustainable power sources, Brennan said, the mood is for insurers to stop insuring the producers of fossil fuels, which has been particularly prevalent in the coal mining sector.
“Transitioning to cleaner sources of power, however, is not a quick process,” he said. “The Paris Agreement will not see the full phase-out of coal until 2040. This clearly creates both challenges and pressures for the captive market; on the one hand, it reduces a captive’s access to market support for certain larger exposures, commonplace in the mining sector. Meanwhile, on the other hand, with large insurers exiting the coal market, there is a transitional gap that needs to be filled. Recently Guernsey has seen the creation of captives designed with this kind of transitional risk in mind.”
On an aside, Brennan added, coal-mining captives are nothing new, harking as far back as to the first known usage of the term “captive” in the 1950s - owned by the Youngstown Ohio Steel Company.
As to whether burgeoning considerations around ESG create new opportunities for captives, he highlighted that a company being recognised for its ESG credentials will find it easier to attract investors, build customer loyalty, improve financial performance and make business operations sustainable.
“As a flexible tool, captives can provide a whole host of opportunities and solutions to ESG challenges,” he stated. “Recently, we have experienced a lot of clients taking a healthy approach to ESG and its recommendations.
“Practical examples include captives providing short-term life cover which has improved working conditions (Social), wind turbine accidental damage cover (Climate protection and sustainability), double glazing warranties (Energy efficiency) and cyber insurance (Governance and data privacy). As previously, mentioned captives are also providing cover for transitional risks and ATE (both Social).”
A concern voiced by many ESG proponents is that the framework is so often conflated to mean just ‘climate’ – ignoring the range of topics that it encompasses. Exploring this in relation to the captive market, Brennan noted that climate is, without a doubt, an important component of ESG.
“However,” he said, “from a captive perspective, limiting greenhouse gas emissions, using sustainable energy or engaging in a carbon-offset programme may not be materially applicable to a number of clients. Although the latter in isolation, and without the reduction of in-house emissions, may be akin to a cigarette in an aerobics class. In practice, we have found that captives have already been focusing on “Social” and “Governance” for quite a number of years.”
By way of example, he noted that for over 20 years, ARM has administered captives whose driving purpose is to provide individuals with “Access to Justice” through After the Event (ATE) Legal expense insurance.
ATE provides cover for the costs payable by an individual in the event of unsuccessful legal proceedings, he said. In the absence of this cover, aggrieved individuals would have to forego making a claim on the basis of cost. ATE enables people to access justice on many fronts from personal injury claims, through to mortgage miss-selling and faulty cavity wall insulation - to mention but a few. It goes a little way to demonstrate the flexibility of a captive.
Exploring the other sustainability considerations beyond climate that are currently impacting captive owners, Brennan highlighted that captives play a large part in corporate sustainability and the development of long-term stakeholder value.
“They often come into play where companies either cannot find insurance or it proves uneconomic to obtain it in the commercial market,” he said. “As we all know without insurance it is very difficult to operate most businesses. Without PI cover, many accountants, financial consultants, surveyors, engineers and healthcare professionals may simply have to shut up shop.
“Manufacturers commonly need liability cover, business interruption, property cover, workers compensation, product recall etc. In the absence of these types of insurance, the sustainability of the company and the social environment it impacts would suffer.”
As the largest independent captive manager in Europe, ARM supports clients in navigating the opportunities and challenges presented by the evolving presence of ESG on industry-wide agendas in a variety of ways. Digging into these, Brennan shared the advice proferred to him in his first history lesson in secondary school when his teacher Mr Jennings emphasised that, “history meant different things to different people at different times”.
“ESG is no different albeit possibly lacking the dry humour and fire-red afro of Mr Jennings,” he said. “ARM recognises that captives are very rarely off-the-shelf products. Each client will come from a different background, with a different history and different needs. As an independent insurance manager, ARM have the flexibility to help create and manage an insurance entity designed purely with the client’s needs in mind.”
If you have questions or would like to investigate how a captive might benefit your company, we are happy to produce feasibility studies based on your circumstances and requirements. We generally produce these free of charge because we value long-term relationships. ARM is Europe’s largest independent insurance manager and in our 20 years, we have seen many scenarios, most of them unique.
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