Captive Insurance – A Tool for ESG Strategy?

Environmental, social and governance (“ESG”) considerations are increasingly becoming a principal discussion point of investors, consumers, regulators, governments, and companies. Internationally, companies which have been greenwashing certain of their products risk being fined by environmental regulators. This had led companies to focusing more on the underlying relationship between their financial activities and the impact of such activities on society in general.

Aside from applicable EU legislation including the Taxonomy Regulation and the newly-introduced Corporate Sustainability Reporting Directive which is expected to lead to increased regulatory compliance risks for companies across the board, the United Nations has also established insurance sector-specific Principles for Sustainable Insurance, which were designed to be applicable to all types of insurance organisations worldwide, irrespective of whether such insurance organisations carry out life or non-life business.

As a result of enhanced ESG requirements and sustainability risks as well the possibility of financial repercussions that may arise as a result of companies failing to properly implement robust ESG strategies (irrespective of whether these are insurance companies or businesses involved in non-insurance related industries), many companies are progressively seeking to clearly define and establish their ESG strategy, manage their ESG investments and initiatives, and furthermore, to mitigate their ESG risks. While some companies have opted to manage their own ESG strategies, certain other companies have found that their ESG strategy and initiatives may be tackled through a captive insurance company.

A captive typically has one primary insured entity, i.e. its parent organisation, which therefore allows all types of captives to generally obtain a better understanding of a particular risk than a traditional insurer. Since a captive insurance company typically only insures the risk of its parent (and does not insure risks for entities which are external to the group), the regulations applicable to the licensed captive insurance companies are generally less stringent than those applicable to insurance companies also covering third-party risks. A captive may also be used as a tool for large multinational companies to consolidate their risk exposures. Furthermore, some companies, especially those with niche business models and complex risks, may find that purchasing insurance to cover their business risks may be difficult, or in certain instances, impossible. In these scenarios, setting up a captive insurance company proves to be a practical solution and may also reduce price volatility for uninsurable risks.

Aside from the above-mentioned benefits – which are typically the reasons that a parent company would set up a captive in the first place – a captive may also act as a means of supporting sustainability objectives of its parent by making ESG considerations an integral part of the captive’s insurance strategy. A captive may embed ESG into its strategy in a variety of ways, which include: (1) by incorporating ESG-related metrics into the assessment and measurement of risks in order to have better visibility over the scale/gravity of a specific risk (and proceeds generated from the underwriting approach may then be used to further invest and improve said ESG-related metrics); (2) by aligning the captive’s investments with the parent organisation’s ESG goals by utilising its profits to invest in sustainable investment funds; (3) by providing insurance cover to smaller businesses and/or specific segments of society/industry which struggle to obtain insurance cover for particular risks due to the reluctancy of more traditional insurers to insure such risks.

In Malta, protected cell company legislation allows for the setting-up of captive insurance cells, which prove to be an attractive option for prospective owners of small to medium-sized captives, allowing prospective owners of a captive the possibility of acquiring a dedicated space (i.e. a cell) on an already active insurance platform (i.e. the protected cell company). Some of the benefits of establishing a cell within a Maltese protected cell company (“PCC”) include the speed of set-up (authorisation of a pure captive insurer/reinsurer takes a maximum of 3 months in Malta), cheaper premiums for captives, cheaper management costs, the possibility of recourse to the assets of the PCC once cellular assets have been exhausted, as well as Malta’s extensive double taxation treaty network. Furthermore, from a regulatory perspective, captives in Malta are exempt from certain requirements, namely they are not required to participate in the Protection and Compensation Fund established in Malta and they are exempt from exhibiting audited financial statements and from certain publication/notification requirements, amongst others.