Why this MGA is betting on carbon insurance

Specialist insurance provider CFC has entered the voluntary carbon market (VCM) with the launch of a carbon delivery insurance product that safeguards the purchase of carbon credits.

VCMs are decentralized markets in which individuals or organizations buy credits to voluntarily offset their carbon footprint, according to the International Federation of Accountants.

Credits are bought from project developers who are engaged in projects that remove or reduce carbon or greenhouse gases (GHGs). Projects range from small community-based activities such as clean-cookstoves, to large industrial-style projects including high-volume hydro plants and commercial reforestation, per CarbonCredits.com. 

Project developers or companies can sell their credits directly to buyers or through a broker. They can also sell their credits to a retailer, who can then resell the credits to a buyer.

CFC’s product protects the purchaser’s investment for non-delivery of carbon credits. CFC claims it’s the first to cover both physical (NatCat) and political risks (counterparty credit risk) faced by businesses purchasing voluntary carbon credits on a forward basis, covering 100% of the purchaser’s investment for non-delivery of carbon credits.

To understand the increasing demand for carbon insurance to help mitigate risks associated with the VCM, CFC surveyed 549 wholesalers, investors, corporate buyers and project developers in Canada, the U.K. and U.S. whose organizations already operate in the voluntary market. The survey found:

• 75% of existing buyers are ‘very concerned’ about delivery shortfalls
• 65% have experienced losses from non-delivery
• 80% say they are very likely to consider purchasing under-delivery insurance
• 50% of non-buyers say they would be more inclined to purchase voluntary carbon credits if they could insure them against non-delivery risk

“The response was unequivocal…We’ve suffered these types of losses before,” George Beattie, CFC’s head of innovation, tells Canadian Underwriter in an interview. “‘If insurance was involved, we’d be more inclined to get involved in the market. And I’m very interested in insurance for this [non-delivery] issue.

“So, those responses were a very clear signal that insurance is not only going to be tolerated, it is being invited by market participants because they want it to play a role.”’

Digestible chunks

CFC researchers studied the carbon market for about a year, and decided to target the VCM first and “take off digestible chunks that represent different product opportunities,” Beattie says.

“Right now, we’ve chosen to provide a product — carbon delivery insurance — which is for the forward purchaser of voluntary carbon credits,” Beattie explains. “Now, there might be a product that’s tenable for the seller of the voluntary carbon credits on like a yield insurance basis.

“There are half a dozen to a dozen products that I can think of across the wider carbon space on both the voluntary and compliance side.”

The compliance side appears to be the approach Canada is taking, where the federal government has placed a price on carbon pollution. The hot-button issue has prompted Conservative leader Pierre Poilievre’s ‘Axe the Tax’ campaign and opposition from some premiers, and has even led to carbon tax protests in Alberta.

“Essentially, you have different schemes around the world that oblige typically heavy-emissions industries like manufacturing, transportation, aviation — those kinds of things — to buy allowances in order to undertake their business,” as Beattie explains the compliance market. “It is essentially a pot of credits, otherwise known as allowances, that reduces every year.

“What that does is increases the cost of allowances and creates a disincentive to carry on doing what you’ve been doing, which is polluting to the extent you were before.”

On the other hand, the VCM involves entities buying and selling voluntary carbon credits. “Now, these are different to your compliance allowances, because these credits are developed or produced by typically natural assets like forests, mangroves, soil even…,” says Beattie, adding that there are more than 160 different types of projects able to produce voluntary carbon credits.

“In the voluntary market, you buy a credit because you want to retire it against unavoidable emissions in pursuit of a net-zero or decarbonization strategy,” Beattie says. “It is voluntary in that you don’t have to buy them, but companies increasingly are buying them because they want to offset their unavoidable emissions.”

Looking ahead, Beattie sees a global market rather than compliance and voluntary markets.

“It’ll probably be a single regime that is defined by two steps… Step one will be, ‘tell us what your emissions are.’

“Step two at some point in the future will be the lever that government pulls to do something about climate change and to say, ‘Okay, we’re all now in an allowance regime. You may buy certified carbon credits that meet this grade.’”

Feature image by iStock.com/Sakorn Sukkasemsakorn