Oka’s Slater: Insurance a “catalytic opportunity” for scaling the carbon market
Carbon credit insurer Oka is on track to begin underwriting through its new Lloyd’s syndicate in a box (SIAB) on 1 January 2024 to help harness the role of insurance in the sustainable development and scaling of carbon markets.
Chris Slater, CEO of the Park City, Utah-headquartered start-up, told ESG Insurer that SIAB 1922 will commence underwriting as scheduled following approval from Lloyd’s Capital Planning Group.
“From conception of the idea at the end of December last year, in 12 months we’ve built products – with the syndicate being that manufacturing hub for us to build the product – and we’ve got customers signed up and ready to buy,” said Slater.
For the risk-based capital that will back the syndicate, Oka has its own corporate member which will close a funding round before 1.1.
Launched as part of the Future at Lloyd’s initiative in September 2019, the SIAB framework is designed to enable entrepreneurial businesses to establish a Lloyd’s underwriting platform at a smaller scale and lower cost base.
“The Lloyd's syndicate model had a couple of advantages that I couldn't get elsewhere. The brand and the A rated paper, and Lloyd’s gives us the global licence. It's not a priority, but over time that will give us an ability to execute on an international plan,” Slater explained.
“By doing the SIAB model, you get access into the Lloyd's market and to syndicated capital that effectively reduces the capital that we need to deploy ourselves, which at this stage is crucial to write profitable business.”
SIAB 1922 will initially focus on providing cover against post-issuance risks associated with carbon credits.
A mechanism for pricing and transacting carbon, carbon credits have existed for around 20 years but have grown in profile and volume over the last three to four years, with estimates that the voluntary carbon market (VCM) is currently valued at around $2bn.
With the VCM currently unregulated, corporate buyers of carbon credits essentially take on all of the balance sheet risk in the transaction, as well as any potential reputational implications if the project fails.
Insurance can therefore bridge this gap for buyers that are on the hook for expenses by providing a key liquidity component.
“Our mission is really simple. We want to ensure that every carbon credit is insured, and that an insured credit be a signal to the market that it is a credit of a particular value or substance, in order to build a foundation for a new and evolving carbon market in the future,” said Slater.
SIAB 1922 will therefore look to offer protection to corporate buyers that are looking to use carbon credits imminently to achieve their net-zero targets, particularly in the current era of higher standards and deeper scrutiny around decarbonisation disclosures and reporting.
“These credits have been bought very publicly, so we're focusing our products around insuring the credit if something happens to the underlying project that effectively renders that credit useless in some way,” Slater explained.
The cover includes reversal risk in the event that a carbon project releases carbon back into the atmosphere and renders the credit null and void. For example, this reversal may occur through a natural catastrophe or a human-induced event such as illegal logging on a reforestation project, or a defect in a direct air capture plant.
A credit may also be nullified through invalidation of the credit if a registry determines that the methodology has overcredited or double-issued on a project.
“They're the main two buckets of coverage, and we've built fairly sophisticated pricing and underwriting laws to price the risk by project type, from nature-based through to engineered technology removal,” added Slater.
“We're pricing for all of those project types in all locations, so we've got a fairly wide appetite in terms of what we're looking to price with our first product.”
Assigning value to a carbon credit
Although carbon credits vary in duration and risk profile, they are not currently systematically differentiated for buyers owing to issues around fungibility.
“There's much debate in the market about carbon credits. Are they a commodity? Are they fungible? Can you look at one credit being like another credit?” said Slater.
“We definitely need more reporting and standards, but we also need better accounting treatment and better understanding of whether the tonnage of carbon has been removed or not.”
This includes the application of other financial market standards such as accounting and auditing in order to determine the value of a credit, which Slater noted will benefit the maturity of the market as a whole.
“It doesn't mean there will be a bifurcation of the market where suddenly you’re orphaning a whole range of credit linked to projects that people will look at as being worthless. I challenge that those credits aren't worth anything – their environmental credibility may not be as good as others, but they should still hold value,” he said.
“That's where insurance can play a role. Take another asset such as a house that has been damaged, it will reduce in value until it’s repaired. Here, insurance can play a role in saying that a carbon credit was previously worth a ton but no longer is, so insurance pays out for the difference.”
Earlier this month, Oka became the first dedicated carbon insurance company to join the International Emissions Trading Association, a trade association for international carbon markets.
“It's an important body in terms of influence and pushing standards in the market. For us, we see insurance being a catalytic opportunity for more investment and therefore we want to work with the various actors in the ecosystem to effectively make the market better,” said Slater.
“Ultimately, we’re trying to introduce our insurance concept to try and help solve some of the current flaws that exist in the current ecosystem and allow it to scale more sustainably,” he concluded.
“My call to arms is that we've got lots of tools and capabilities within the insurance industry – actuarial modelling, understanding how to price risk – that need bringing into the carbon market to allow it to scale. I guess I'm hoping that we're on the start of a wave of a real movement for the industry to come and play a role.”