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Aon highlights how captives can drive positive ESG outcomes

29th November 2022 - Author: Kane Wells

A recent Aon report has highlighted how using a captive insurance company can drive positive ESG outcomes, alongside how the UN Environment Program’s Principles for Sustainable Insurance can aid captive owners to address ESG risks and opportunities.

Aon notes that despite variations on the traditional captive definition, all types of captives can generally take a more acute view of ESG risks at an organisation compared to a traditional insurer.

Another important aspect of a captive’s role in the broader sustainability discussion is its position as the expert underwriter for the parent, says Aon.

The firm suggests that a captive having its portfolio limited to the parent organisation gives its underwriters a closer look at the specific actions taking place at the business unit level within the parent.

This allows underwriters to mitigate ESG risks and promote sustainability, says Aon, while traditional insurers typically rely on disclosures, ESG ratings agencies, and other assessments across entire economic sectors or lines of business.

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Aon adds that by using the captive as a means to apply underwriting discipline on the risks, a parent organisation can typically develop a better understanding of the underlying characteristics of the risk and begin the process of building a means to manage the inherent volatility through the application of insurance accounting principles, while also improving risk management and reporting practices.

Butch Bacani, Program Leader for the UN Environment Program’s PSI, writes, “Given their unique structure, captive insurers have a key role to play in addressing environmental, social and governance (ESG) issues—such as climate change, nature and biodiversity loss, pollution and waste, and human rights—and in achieving positive impact in both the insurance industry and the broader economy.

“The role of captives in tackling sustainability challenges is, however, not well-understood and is a largely untapped opportunity. This report is timely because it captures how captives can develop and implement sustainability best practices across their risk management, insurance and investment activities.”

The PSI serve as a global framework for the insurance industry to address ESG risks and opportunities—and a global initiative to strengthen the insurance industry’s contribution as risk managers, insurers and investors to building resilient, inclusive and sustainable communities and economies on a healthy planet.

The initiative was launched in 2012, and since its inception more than 220 organisations have joined, including insurers representing about one-third of world premium and $15 trillion in assets under management, and the most extensive global network of insurance and stakeholder organisations committed to addressing sustainability challenges.

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