Opportunity for securitized nature-based insurance solutions: Report

A new report details an opportunity to create insurance solutions to underpin the nature-based carbon market and suggests that securitizing them would be a way to unlock new capital, while feeding investors appetites for insurance-linked investments and an environmental, social and governance (ESG) appropriate asset.

The report was published by carbon market firm BeZero Carbon, alongside the insurance and reinsurance broking group Howden, and UK insurance broker, Blackford.

The report explains that the voluntary carbon market could be a US $50 billion annual revenue marketplace by 2030.

At the same time, nature-based solutions are forecast to generate US $800 billion by 2050.

“This represents a huge opportunity to create a new insurance market estimated to be worth $1.3 billion globally and up to $2-4 billion in blue sky scenarios,” the report authors explain.

There is an opportunity for the insurance and reinsurance industry to capitalise on this, by expanding from adjacent markets and risks to serve the carbon market and emerging nature-based solutions sector with risk transfer and financing solutions.

Nature-based Solutions are described as “activities that result in the sustainable management and restoration of our ecosystems.”

By evolving the insurance and reinsurance product landscape and designing risk transfer and financing solutions to support and augment both carbon market and nature-based solutions, there is an opportunity that could speak to the insurance-linked securities (ILS) market, in terms of risk-based offsets for climate exposures, as well as the ESG investment community, in terms of producing an insurance-linked asset that meets ESG guidelines.

The report authors highlight the, “Significant opportunity the insurance industry could play in securitising the nature-based carbon market and unlocking the capital needed to scale it.”

The authors wrote, “Practically, the insurance sector has a strong incentive to support existing customer bases in agriculture, finance and industry as they look to expand into or finance the emerging markets for carbon and NbS. And in the longer term successfully addressing the climate change challenge will also reduce climate adaptation risk for the sector.”

Going into more detail to explain that, “Insurance solutions can provide purchasers or sellers of carbon credits with protection against either the non-delivery or reversal of carbon stocks. Such reversals could be ‘voluntary’, or ‘avoidable’ due to project mismanagement, negligence or fraud, misrepresentation or error by the project owner or verifier, premature termination of a project, or unanticipated change in land use. Insurance can also cover involuntary or unavoidable reversals i.e. those due to force majeure or natural catastrophe events. Insurance claims could be settled either by replacing the insured credits with equivalent credits from a comparable project or with monetary compensation.”

Innovation is required to unlock this opportunity, as well as partnerships to leverage knowledge and guidance from those deeply embedded in carbon markets and the emerging nature-based solutions sector.

“Adjacent markets such as timber or crop insurance and existing insurable risks (professional liability, natural catastrophe) provide a natural starting point, and could be bolstered via partnerships with established players using pilot schemes and sidecar investments,” the report authors state.

Carbon markets are awash with uncertainty, have a high-level of historical failures, and are generally underdeveloped, it is reported, but insurance and reinsurance products and capital can assist in de-risking and also allocating risks more appropriately.

“Insurers could use their risk knowledge to price downside risks such as fraud or natural catastrophe appropriately, and can help to distribute such risk exposures into the securitisation and reinsurance markets,” the authors believe.

Ronan Carr, Chief Research Officer, BeZero Carbon explained the need, “Nature-based Solutions are crucial to achieving global net zero targets. There are no scenarios where deforestation or ecosystem degradation can occur simultaneously to successful climate action. The nature-based carbon offset markets are crying out for insurance solutions in order to scale quickly.”

Charlie Langdale, Head of Climate Risk and Resilience, Howden added, “Insurance has a significant role to play in society’s journey to a low-carbon future both by de-risking companies’ and industries’ transition to low-carbon energy sources and in helping to increase confidence behind the removal of carbon from the atmosphere.

“Soon enough, regulation will come into this market and certain risk management controls will be mandated, but the insurance industry shouldn’t be waiting for this to happen – we have an important role to play now. There is a huge pool of untapped modelling skills, data and capacity that could be used to accelerate the growth of NbS, a market that has the potential to provide up to 30% of the climate mitigation required to limit global warming to 1.5 degrees.”

Tom Aldridge, Founder and Managing Director, Blackford also said, “Insurance fosters confidence which, in turn, attracts investment. In order to grasp the opportunities associated with Nature-based Solutions and carbon markets, as an industry, the insurance sector must transition to a more proactive position; helping build the knowledge and comfort required for future capital investment in this fast-developing area.”

Carr concluded, “Whilst insurance products aimed at NbS markets have been slow to take off, efforts to achieve greater standardisation and regulation are gaining momentum, whilst private sector innovations are multiplying in the carbon and natural capital markets, raising the bar for transparency and accountability.

“To capture this opportunity, insurers need to set out a bold and clear strategy of how to integrate insurance solutions into this new market. I hope the sector can take forward the recommendations set out in this report and accelerate this change in the industry.”