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Captives can play key role in ESG initiatives


TUCSON, Arizona — Captives can be used to help formulate an organization’s environmental, social and governance strategy and provide funding for ESG efforts, a panel of experts said.

Attention to ESG issues can also help captives secure reinsurance capacity, particularly with European reinsurers, they said. 

“The biggest risk about ESG is ignoring it,” said Michael Douglas, Newtown Grant, Pennsylvania-based director of business development for Aon PLC’s captive management operations.

Under pressure from regulators, investors, activists and others, corporations, particularly in Europe but also in the United States, must be seen to be working to identify and report what they are doing on ESG initiatives, he said during a session at the Captive Insurance Companies Association international conference in Tucson last month.

Captives, which are designed to solve problems for their parent companies, are well-positioned to act as a focal point to identify ESG issues and implement and document a company’s strategy for addressing them, he said.

The Guernsey International Insurance Association last year published a framework for captives and insurers to address ESG risks, said James Stewart, Guernsey-based client services director at Artex Risk Solutions, a unit of Arthur J. Gallagher & Co.

The framework “acts as a handrail for licensed insurers to consider their operations, their own activities against the U.N. sustainable development goals,” he said.

It addresses four aspects of captive operations: governance, making ESG considerations part of routine strategic planning for a captive; risks underwritten, including understanding the impact of ESG risks, such as climate change risks; investments, including the ESG footprint of the investments; and reporting, to ensure that the captive board is comfortable that it has fulfilled its ESG reporting requirements.

Captive boards and risk managers can use the framework to engage on ESG matters with the senior leadership of their organization and discuss whether a captive should cover any of the risks, Mr. Stewart said.

Reinsurers, who must meet their own ESG requirements, will likely look favorably on captives that are addressing ESG issues, Mr. Douglas said.

In addition, captives can be used to fund environmental remediation efforts, he said.

Sandvik AB used its captive to finance a climate change risk assessment, said Fredrik Finnman, head of group risk management for the Stockholm-based engineering company.

In addition, Sandvik has changed its asset management policy for its captive to allow investments in green bonds, which are financial instruments that support projects that have a positive effect on the environment, he said.

In addition, commercial directors and officers liability and general liability insurers in Europe are seeking significantly more information from policyholders about ESG risks, Mr. Finnman said.

“The insurers want to make sure that we play fair as a company and that we do the right things, and that we monitor who we do business with,” he said. “Also, do we follow trade sanctions.”

While U.S. insurers are less concerned about ESG issues than European insurers and reinsurers, captive surpluses can also be used for various environmental infrastructure projects, such as installing solar panels on buildings, said Karen Hsi, program manager-captive insurance programs for the University of California, office of the president, in Oakland, California.

Captive reviews help overcome creeping claims problems: Panel

TUCSON, Arizona — Businesses should periodically review their captives to ensure they keep pace with changing exposures and claims trends, a panel of experts said.

Failure to adapt can lead to significant losses, even for captives with long records of profitability, they said. 

“It’s really important not to become siloed and fall in love with your operation. The world is changing out there,” said Robert Blasio, a Houston-based managing director at Gallagher Specialty, a unit of Gallagher Bassett Services Inc.

He was speaking during a session at the Captive Insurance Companies Association’s international conference in Tucson last month.

Emory Health, the health care system of Emory University in Atlanta, has seen substantial growth in its captive Clifton Casualty Insurance Co. since it was formed, said Shulamith Klein, chief risk officer for the university.

The system has 11 hospitals, 2,800 physicians, 34,000 employees and 6,000 medical students, she said.

The captive was set up in Colorado in 1981 to insure medical professional and general liability risks. By 1999, it was expanded to cover enterprise risks for the health care system and university and was moved to the Cayman Islands, she said.

The captive was profitable during the expansion, Ms. Klein said. In 2017, however, claims began to escalate as jury awards increased and medical inflation accelerated. In 2018, the captive reported an underwriting loss of $10 million, and in 2019 the underwriting loss was $27 million, she said.

“Our board requested that we solicit an external site review of our claims and risk management functions,” Ms. Klein said.

Gallagher analyzed the operations, including a review of the captive’s purpose. In addition, the TPA reviewed Emory’s litigation philosophy, Mr. Blasio said.

“That’s a question that anybody who is a captive owner should be asking every year as you have your annual captive board meeting,” he said.

Over the prior five years, Emory had begun to place a bigger emphasis on patient safety, which drew on resources of the risk management department, Mr. Blasio said. As a consequence, many of the system’s claims were handled by outside counsel.

“Emory was effectively using outside counsel as a component of its claims management process … at outside counsel rates,” he said.

In addition, Emory’s risk management information system was little more than an incident management system, Mr. Blasio said.

Emory also reserved early for potentially compensable events, which included any incidents the organization thought might lead to a claim, said Chad Wischmeyer, Atlanta-based managing partner for the actuarial practice of Oliver Wyman, a unit of Marsh & McLennan Cos. Inc.

Substantial reserves were put on the potential claims,  but only about 10% of the events resulted in claims, he said.

By analyzing the reserving practices and bringing in outside expertise, the risk management department was able to show the finance department that there was another way to approach the process, Ms. Klein said.

After the review, Emory moved to a collaborative model that used internal resources and a third-party administrator, Mr. Blasio said.

Other measures that captive owners should take include regularly reviewing policy forms, said Maryann McGivney, Atlanta-based health care industry leader at Willis Towers Watson PLC.

“Make sure you are getting a good, deep, honest policy review on a regular basis,” she said. The review should include discussions on policy wordings during captive board meetings.

In particular, boards should review exclusions in the policies, Ms. McGivney said. Board members often raise concerns about how exclusions affect new facilities or operations that an organization’s risk management department may not be aware of, she said.

“It’s a good opportunity to get senior leaders to eyeball this stuff and let you know if there’s something you are missing,” Ms. McGivney said.

Going through the list of named insureds and additional insureds at a board meeting is also an effective way to ensure that all risks are covered, she said.