Generali develops framework for Green insurance-linked securities (ILS)

Generali, one of the largest global insurance and asset management companies, has recognised the potential for insurance and reinsurance linked investments to have green or ESG credentials and has developed a framework for Green insurance-linked securities (ILS).

As a recognised European sponsor of catastrophe bonds, as one of the way’s it sources reinsurance protection from the capital markets, Generali is already a participant in the ILS market.

But the company is also a huge investor and has a focus on creating new framework’s for sustainable investing, resulting in this move to develop what it calls a “Green Insurance Linked Securities Framework”.

Generali said that this is aligned with its own sustainability and capital management strategies, with the initiative to develop a framework for Green ILS closely related to one it has already worked on for Green bond investing.

With environmental, social and governance (ESG) factors seen as increasingly important by institutional investors, the ILS asset class and the provision of insurance or reinsurance capacity to support catastrophe and disaster risk transfer have heightened the focus on the ILS market of late.

Generali Group CFO Cristiano Borean explained, “The Generali Green Insurance Linked Securities Framework is a further step in our sustainability strategy and a confirmation of the Group’s commitment in this regard. It also demonstrates the Group’s innovative approach to managing capital in line with the Generali 2021 strategy and long-term commitment to the Insurance Linked Securities market.”

Generali has sought a second party opinion from sustainable investment analytics firm Sustainalytics on its new Green ILS Framework.

The company explained what can define an ILS transaction and structure as ‘green’.

“Green ILS are characterised by the investment of collateral in assets with a positive environmental impact, and by the allocation of the transferred solvency capital to sustainable initiatives – like investments in green assets and support to the underwriting of green policies – according to predefined selection and exclusion criteria.”

Generali said that its Green ILS Framework is a first contribution to the development of guidelines for Green ILS structures going forward.

The insurer and asset manager has designed the Green ILS Framework so that it reflects the structure of an ILS transaction that enables it to allocate funds to Green initiatives.

This can be achieved in two ways, the company explains, firstly by making use of the freed-up capital benefit achieved through the ILS transaction for Generali’s Green assets and underwriting and secondly by investing the proceeds of the ILS transaction that are held and segregated in the issuing special purpose vehicle (SPV) in a portfolio of Green investments.

On the first method, Generali further explains that an amount equivalent to the capital relief benefit achieved through issuance of a Green ILS transaction would be exclusively used to allocate capital to or re/finance green initiatives, projects or assets.

For the second method the definition of an eligible investment for the proceeds of the sale of the ILS notes will be expanded to include redeemable notes, the proceeds of which can be used to finance green initiatives, projects and assets, as in the first.

Sustainalytics commented on the framework saying that it is, “Of the opinion that Generali’s Green ILS Framework is credible and impactful and will deliver overall positive environmental benefits. Sustainalytics further notes the alignment of the Framework with the two of the key principles underpinning the sustainable finance market, namely those of impact and transparency.”

There is much more information on the Green ILS Framework over on the Generali website including documentation and the second party review details.

The approach is similar to that taken by the World Bank with its latest sustainable development catastrophe bond concept, which enables the proceeds of the sale of the notes to be used within IBRD sustainable developmental programs and projects.

These initiatives are helping to expand the benefits of a catastrophe bond or ILS transaction beyond the core disaster risk financing remit of an insurance-linked security (ILS) to also tick other boxes for ESG focused and sustainable investors.

It’s encouraging to see an insurance giant like Generali embracing this green approach to ILS and looking to help develop frameworks the community can use.

In recent years Generali has sponsored three ILS transactions for its reinsurance needs, the Lion I Re, 2014 and Lion II Re, 2017 catastrophe bonds and one motor third-party liability cat bond Horse Capital I, 2016.