As the market for in-house insurance surpasses a record $200 billion, the rising trend of captive insurance reflects how a hotter, less stable planet is reshaping corporate risk management. Captive insurance, where companies establish their own coverage vehicles, has seen significant growth, driven by the escalating costs and complexities associated with climate change. This development underscores the broader impact of environmental factors on financial strategies and insurance practices.
The Rise of Captive Insurance
Captive insurance is gaining traction as companies seek alternative ways to manage their risks. According to insurance broker Aon Plc, the trend is particularly pronounced in sectors heavily impacted by climate change. Oil and mining firms, for example, are increasingly using captive insurance to circumvent the high costs and limited capacity of external insurers. John English, chief executive of captive and insurance management at Aon, highlights that many insurers have opted out of providing coverage to fossil-fuel companies due to affordability and capacity concerns.
Impact of Climate Change on Insurance
Climate change is driving significant shifts in how insurance markets function. The economic cost of covering climate-related risks is ballooning, prompting a surge in the use of captive insurance. A recent report by Aon noted that the captive insurance market has grown significantly, with roughly a quarter of the nearly 3,000 surveyed companies now using such arrangements, up from 17% in 2021. Peter Carter from Willis Towers Watson observes that captives are serving as a “shock absorber” for companies dealing with amplified risks due to climate change.
How Captive Insurance Works
A captive insurance arrangement typically involves a special-purpose vehicle created to insure or reinsure the risks of its parent company. Companies transfer premiums to these internal insurance vehicles, which may also split coverage with external insurers or utilize alternative-risk transfer solutions like parametrics. Captives offer tax benefits and allow companies to reinvest surplus cash from premiums. They are used to cover a range of risks, including environmental hazards and cyber threats. However, data on captives does not fully capture the extent of in-house insurance practices, as some companies opt for self-insurance without creating a regulated SPV.
Market Growth and Challenges
The global captive insurance market exceeded $200 billion in premiums last year, setting an all-time record. This growth reflects the challenges faced by mainstream insurers, who are raising prices to levels that make their services increasingly inaccessible. Sectors affected include utilities and renewable-energy operators. Extreme weather events are pushing insurers to increase rates, leading some companies to establish captives as a more viable alternative.
Sector-Specific Responses
A growing number of insurers and reinsurers are retreating from fossil-fuel companies as they align with climate policies and the transition to cleaner energy. According to Insure Our Future, 46 insurers globally now impose restrictions on coal, oil, or gas companies. Major firms like BHP Group Ltd., TotalEnergies SE, and BP Plc have established in-house insurance entities to manage their risks. Other companies, such as Australian coal producer Whitehaven Coal Ltd., are also setting up captives in response to tightening insurance availability.
Government and Industry Responses
In some regions, government-funded programs are stepping in where commercial insurers have retreated. North Dakota, a state with significant oil and coal reserves, is recommending captives for companies facing high rates and limited policy renewals from traditional insurers. This move reflects a broader trend of companies turning to captives as a solution to the challenges posed by climate-related risks.
Potential Drawbacks of Captives
While captives offer a strategic advantage, they are not without criticism. Ariel Le Bourdonnec from Reclaim Finance argues that captives represent a “shadow part of the insurance industry” that could hinder the transition to green energy. There is also a risk that companies may underestimate the risks they face when relying solely on in-house insurance. The BP Deepwater Horizon oil spill serves as a cautionary tale, where the company’s captive insurance arrangement was insufficient to cover the extensive costs of the disaster.
Conclusion
The rise of captive insurance highlights a significant shift in how companies manage risk in an increasingly volatile climate. As traditional insurers retreat and prices rise, captives offer a viable alternative for many sectors, particularly those affected by climate change. However, this trend also raises concerns about the potential for prolonging the life of high-emitting assets and the adequacy of in-house insurance arrangements. As companies navigate these challenges, the role of captives in the broader insurance landscape will continue to evolve.
Related Topics:
