London-based insurance broking group Howden has launched its first carbon credit guarantee and indemnity (W&I) insurance policy. The policy will cover the sale of carbon credits for Mere Plantations’ reforestation project in Ghana (restoring degraded forest land). The policy will be underwritten by a leading general agent.
This milestone is crucial for the voluntary carbon market as it significantly boosts confidence in the quality of carbon credits, potentially allowing many more investors to enter the market.
The role of insurance in climate finance
The insurance industry is one of the world’s largest pools of non-government capital and is crucial to financing infrastructure projects. In 2017, insurers faced losses of $140 billion in climate-related infrastructure losses.
Climate policy expert Dr Leah Stokes has predicted that the cost of climate disasters in the US alone could reach $500 billion in 2021. Lloyd’s of London reported that rising sea levels increased insured losses in New York from Superstorm Sandy by 30%.
Additionally, more than $500 billion in U.S. coastal assets could be submerged by 2100. Addressing these risks requires sector reform and redirecting trillions of dollars to reducing climate impacts. Without carbon reduction plans, assets may not be insurable.
Moreover, global economic losses due to weather and climate change are exploding: reaching almost $1.5 billion between 2010 and 2019, as shown below.
The financial world is now realising the value of insuring climate-related projects: in 2022, Howden launched the first carbon credit insurance to boost confidence in carbon markets.
Europe’s largest broker believes VCM will play a key role in the global transition to a low-carbon economy. It has announced its first carbon credit guarantee and indemnity (W&I) insurance policy for Mere Plantations’ forestry projects. The UK-based company manages more than three million teak plantations in Ghana, West Africa.
The W&I policy enhances the credibility and value of carbon credits by employing insurance as a governance tool: with an insurance policy that guarantees the credibility of the credits, Mere Plantations can now assure buyers that the credits meet strict environmental, social and financial standards.
Charlie Poole, head of carbon insurance at Howden, stressed that insurance will ensure the credibility of carbon credits, helping them to attract higher value and encouraging further project development.
“Carbon markets are the best tool for putting a price on emissions. Voluntary markets have been hampered by poor governance in the past, but they can now be improved using market-based mechanisms.”
Leveraging underwriting expertise for green projects
This policy allows project developers to leverage the underwriting expertise of the M&A insurance market and ensures confidence in the methodology and execution of their carbon credit projects. Purchasers, recognising this additional protection and the high quality of the credits, are prepared to pay a premium compared to other reforestation projects.
UK-based logistics company Uniserve is the first to buy these credits.
The development follows other Howden-led initiatives, including the first voluntary carbon credit insurance product in 2022, and an insurance product covering carbon leakage from commercial-scale carbon capture and storage facilities due in January 2024.
Mia Plantations CEO Mark Hogg highlighted the company’s mission to make restoring degraded forestland a commercially viable business without subsidy or government intervention. He noted that offering this insurance unlocks the potential of carbon markets to support the company’s mission.
Gary Cobbing, Uniserv’s Group Chief Commercial and Operating Officer, expressed his confidence in the partnership with Mia Plantation, saying:
“Mia Plantations shares Uniserv’s commitment to sustainability and integrity, making them an ideal source of carbon credit investment as part of our ongoing carbon reduction plans.”
The growing carbon credit insurance market
Howden is not the only major player in the burgeoning carbon credit insurance sector.
Kita Earth, a UK-based carbon credit insurance startup, offers insurance for carbon removal credits, and market experts predict new players will soon enter the market, driven by predictions that it will be a billion-dollar market.
According to industry reports, the carbon credit insurance market could reach approximately $1 billion in annual gross premiums (GWP) by 2030, and grow to $10 billion to $30 billion by 2050.
However, this focuses only on VCM and excludes the compliance market, which may underestimate the market potential. In 2023, the global compliance carbon market was valued at over $900 billion, influenced by policy changes and geopolitical factors.
VCM was valued at $2 billion in 2022, but Avertable put the deal value at $10 billion that year, suggesting that investments will be five times the value of the carbon credits issued. A special Barclays report predicts that VCM could grow to $250 billion by 2030, although estimates vary widely from $10 billion to $250 billion.
The report suggests that insurance could bring four key benefits to carbon markets:
It balances risk and innovation, promotes trust, assesses project risks and encourages risk taking.
Indeed, the rapidly evolving carbon market presents a complex landscape with unique risks and significant challenges. The introduction of insurance mechanisms like Howden’s W&I insurance can effectively address these risks, boost investor confidence and stimulate increased investment, allowing the market to scale at the rate required to meet global carbon emission reduction targets.