Atlas Group

Leveraging protected cells for ESG

Ian-Edward Stafrace of Atlas Insurance PCC shares his insights on leveraging protected cells for advancing ESG goals and driving sustainable change

In a world in which ESG considerations increasingly dictate business strategy, risk and insurance managers are uniquely positioned to lead the charge. As ESG, sustainability and climate change adaptation ascend corporate agendas, insurance-protected cells can provide potent tools to drive positive ESG outcomes.

The strategic intersection of protected cells and ESG

With their flexibility and efficiency, protected cells can significantly bolster their parent organisations’ ESG strategy. They align with the long-term strategic view of leading organisations, working proactively to meet the escalating pressures and expectations from investors, governments, regulators and consumers. In this context, risk managers should integrate ESG considerations into their risk financing strategy, aligning with and positively influencing the wider group’s ESG priorities.

The UN Environment PSI

The UN Program’s Principles for Sustainable Insurance (PSI) provide a global framework for addressing ESG risks and opportunities. Cell owners can reap several benefits by adopting the PSI for risk management, innovation and solution development, policy influence and transparency, and accountability. The PSI encourages organisations to consider ESG issues in their decision-making process, which can lead to more comprehensive risk management.

By identifying and addressing ESG risks, cell owners can protect their assets and ensure long-term sustainability.

The PSI promotes collaboration to develop solutions for ESG issues, which can lead to innovative covers and services that meet the cell owner’s and society’s evolving needs.

It encourages engagement with governments, regulators, and other stakeholders to promote action on ESG issues, which can give cell owners a voice in shaping policies that impact their business and wider society.

In addition, the PSI requires regular public disclosure of progress in implementing its principles. This transparency can enhance a cell owner’s reputation, build stakeholder trust and demonstrate commitment to sustainable practices.

This adoption can provide cell owners with a strategic approach to managing ESG risks and opportunities while demonstrating their contribution to the broader societal goal of sustainable development.

Commitment to sustainability

Atlas Insurance PCC is actively committed to sustainability and community engagement. It has recently partnered with renowned swimmer, ocean activist and world record holder Neil Agius. Agius’ ‘Wave of Change’ initiative is a movement that raises awareness of the impact daily decisions have on our seas and oceans. Through this collaboration, Atlas supports initiatives related to sustainability, lessening pollution and increasing wellbeing. The partnership underscores Atlas’s belief in the power of community engagement to drive positive and sustainable change.

Addressing emerging climate change risks

Organisations face emerging climate change issues, including transition and adaptation risks. Companies can use their protected cell as a pre-funding and uncertainty management tool for future risks. They can identify current or future transition risks that will have the most significant impact on the organisation and which assets are likely to be most exposed. They can leverage their data and relationships with actuaries and reinsurers to plan for and address these risks.

Carbon footprint and sustainability reporting

A captive may need to report on ESG due to regulatory requirements. Protected cell companies (PCCs) may have economies of scale to share in this area as they evolve with the changing regulatory reporting landscape. As a PCC is a single legal entity inclusive of the cells it hosts, it has proven itself to be efficient in external reporting. In the EU, for example, a PCC produces a single own risk solvency assessment (ORSA), regular supervisory report (RSR) and solvency and financial condition report (SFCR).

The Partnership for Carbon Accounting Financials (PCAF) has recently created a standard for calculating insurance-associated carbon emissions. Broadly speaking, this entails multiplying the carbon footprint of the insured by the insurance premium charged, divided by the revenue of the insured, which is then added to the insurer’s carbon footprint. There is, therefore, an added carbon cost for insurers and reinsurers. Consequently, forward-looking risk managers are keen to help their organisations reduce their carbon footprint as it can help their long-term risk financing ability.

A group may also fall within the European Corporate Sustainability Reporting Directive (CSRD) scope. Leading organisations can benefit from CSRD by improving their transparency, accountability and reputation among their stakeholders. It may help risk managers gain further insights into their ESG risks and opportunities, which could help align the organisation’s strategy with the EU’s sustainability goals while enhancing its resilience and competitiveness. However, captives could potentially face challenges when complying with CSRD, such as collecting and managing data from multiple sources, ensuring consistency and comparability of disclosures, adapting to changing standards and expectations, and controlling costs and resources. To combat this they can adopt shared resources of PCCs.

Investing with purpose

By investing in sustainable funds that are potentially ESG-rated, a protected cell can align its investment strategy with the group’s purpose. This alignment supports the group’s ESG strategy and demonstrates a commitment to sustainable investment practices.

More asset managers are now offering high-quality liquid funds with sustainability credentials that can fit the typically lower risk appetite for liquidity and credit risk, helping contain capital requirements. The EU’s Sustainable Finance Disclosure Regulation (SFDR) is accelerating progress through the creation and availability of such investments.

The advantage of domiciling in the EU

With an elevated focus on broader sustainability and ESG considerations, the domicile preference onshore versus offshore often depends on stakeholders’ expectations, regulators, tax authorities, investors, customers or employees.

Although offshore jurisdictions can offer a low capital and cost base, growing stakeholder pressure has heightened interest in the establishment of risk financing vehicles within the EU.

Ireland, Luxembourg and Malta are among the EU member states that have tailored themselves to proportionally enable captives while still adhering to EU minimum standards and requirements, including Solvency II and the Insurance Distribution Directive.

Malta, in particular, stands out as the only EU member with protected cell legislation, offering unique advantages for organisations seeking to establish protected cells.

The efficiency and substance of protected cells

Protected cells offer a unique blend of cost-effectiveness and efficiency. EU Solvency II recognises cells as ring-fenced funds, meaning there are no minimum capital requirements for individual protected cells having recourse to the core, as these apply at an overall company level.

Stakeholders are raising the bar for substance. Insurers, including captives, are increasingly expected to have adequate on-the-ground staff and employed key function holders. PCCs can help address substance requirements as cells form part of a broader single entity that provides shared board, governance and key functions in Malta.

Maltese PCCs have shared economies of scale and they are placed within the remit of the EU, yet they are without a standalone company’s complexities, costs and time restraints. These factors can potentially save capital. Additionally, some PCCs actively write EU business through their active non-cellular core. Atlas’s core, for example, is a long-established contributor to its local economy as a traditional non-life domestic insurer. Through occupying multiple branches and offices in Malta, Atlas can provide ample substance to the PCC.

PCCs that actively cover risks in their domicile also address arbitrage objections from stakeholders on insurance companies that only cover risks outside their domicile.

As the world continues to grapple with ESG challenges and opportunities, the role of protected cells in driving positive outcomes is becoming increasingly evident. By leveraging the unique advantages of these structures, organisations can meet their ESG objectives and drive improved risk management.

Ultimately, the journey towards a sustainable future is a shared responsibility. On this journey, protected cells can serve as powerful allies, equipping organisations with the necessary tools and strategies to navigate the complex landscape of ESG risks and opportunities.