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The InsTech perspective… parametric insurance for carbon offset projects
Planting forests, building renewable energy infrastructure and using direct air capture technology to remove carbon dioxide from the atmosphere are all ways to offset the carbon emissions that cause global warming. Companies can buy and sell carbon credits that represent emissions avoidance or reductions from such projects. In 2021, the carbon credit market was worth around $2 billion USD; by 2030, companies could be spending up to $40 billion USD every year on carbon credits.
Companies that operate carbon offset projects are exposed to various risks. Meanwhile companies buying carbon credits could purchase coverage against carbon offset projects failing to deliver as much offsetting as they promised. Parametric insurance is already used to cover carbon offset projects around the world and it can play a significant role in supporting the growth of the carbon credit market.
In a recent case study, Descartes showed how it offered parametric wildfire coverage to an Australian forestry project, protecting it against lost carbon credit revenue caused by fire. Swiss Re Corporate Solutions is covering a construction project for a hydropower plant in Nepal against earthquake risks with a parametric solution, after the project struggled to find traditional insurance coverage.
New technologies for carbon offsetting may require expensive machinery. In a recent interview, the CEO of direct air capture firm Climeworks said the company aimed to create facilities that would remove a million tonnes of carbon dioxide from the air every year (Climeworks’ largest facility currently captures 4,000 tonnes per year). Each would cost “easily in the billions” of dollars, he said. As more facilities are created that offset carbon emissions in new ways, they will need insurance for natural catastrophes. As capacity tightens for traditional catastrophe insurance, parametric insurance could fill the gap.
There are also opportunities for parametric providers to create new products for the carbon credit market. This could include coverage against the underperformance of a carbon credit, using data from third-party providers as an index. For example, dClimate, which provides data for Arbol’s parametric products, is building tools for digital measurement, reporting and verification in the carbon market. Improved technology and data sources for monitoring carbon offsets will enable new parametric insurance products.
InsTech is working on a report into carbon offsets and insurance. If your company is involved in insuring the carbon credit market, reach out to Ali Smedley on LinkedIn to learn more.
In the news…
US • Weather • Hurricane
Arbol, which underwrites parametric climate and weather insurance and derivatives, has become a Lloyd’s coverholder (MGA) and launched parametric weather and climate insurance products for the US market. The perils covered include named storm, precipitation, temperature, snowfall, wind, solar radiation and soil moisture, with limits of up to $5 million USD. Beazley is the lead insurer, with Tokio Marine Kiln and Nephila Capital also providing capacity.
Australia • Agriculture • Weather
Broker WTW has announced ‘Nitrogen Risk Insurance’, a parametric product that helps sugarcane farmers in Queensland, Australia manage weather risk exacerbated by the high costs of nitrogen fertiliser. Nitrogen fertiliser costs in Australia have doubled in the last year and farmers that use less fertiliser risk reduced yields depending on weather conditions. WTW’s parametric product is designed to cover the risk of yield shortfall, using data on temperature, rainfall and solar radiation to trigger pay-outs. Liberty Specialty Markets is providing insurance capacity.
Africa • Flood
The African Risk Capacity (ARC), a multi-country risk pool, has launched parametric flood insurance to protect African governments against river floods. ARC’s parametric policies pay out based on modelled losses, meaning that pay-outs are not triggered by a specific flood metric such as precipitation or flood depth, but by a model that takes into account various metrics and the vulnerability of different areas across a country to calculate a pay-out. The model used for ARC’s new flood product was developed in partnership with JBA Risk Management.
Australia • Agriculture • Weather
Parametric insurance technology company CelsiusPro has partnered with Australian seed management company Hannaford to offer farmers a rebate if there is insufficient rain during the sowing and emergence season. The rebate programme is being trialled in Horsham, Victoria.
Caribbean • Hurricane
The Mesoamerican Reef’s parametric hurricane insurance, structured by WTW, has been renewed for a third year, with AXA Climate providing capacity. The insurance policy was launched in 2021 to cover four key reef sites, expanded to seven sites in 2022 and now covers eleven in total, across Mexico, Belize, Guatemala and Honduras. After the policy paid out for the first time in November 2022, WTW has refined the parametric trigger. Previously pay-outs were calculated based on how much an optimal response to restore damaged parts of the reef would cost; now the trigger takes into account the capacity of local conservation teams to respond.
Descartes Underwriting’s latest blog post focuses on the key areas where parametric insurance is filling gaps in the market left by indemnity-based insurance. The article discusses the growth of parametric for secondary perils and non-damage business interruption, and how hybrid products, combining parametric and indemnity-based insurance, are creating new coverage options for businesses.
Blockchain • InsTech Interview
Cerchia has launched its digital marketplace for parametric risk transfer to capital markets on the Avalanche blockchain. To learn more about Cerchia, you can read InsTech’s recent interview with founders Michael Rey and Fabian Buchmann.
Excess rainfall triggers pay-outs to farmers in Pakistan
Pakistan • Agriculture • Weather
Insurer Salaam Takaful, in partnership with agriculture technology company Syngenta, has made pay-outs to all wheat farmers covered under its parametric weather insurance pilot in the city of Layyah, Pakistan. The pay-outs were triggered by record-breaking rains earlier in 2023. Salaam Takaful and Syngenta have also announced that the pilot has been extended to Okara, Pakistan.
Hillridge partners with insurer on typhoon coverage in Vietnam
Vietnam • Typhoon • Agriculture
Hillridge Technology, which develops parametric weather and catastrophe insurance products focused on the agriculture sector, has agreed a partnership with Vietnamese insurer Bao Minh Insurance. The two companies plan to launch insurance products covering vulnerable farmers in Vietnam against typhoons and other climate risks.
Captive seeking $100m US earthquake catastrophe bond
US • Captive • Catastrophe bond
Hannover Re is seeking $100 million of parametric coverage against North American earthquakes through a catastrophe bond. The bond will provide protection for the captive insurer of US healthcare group Kaiser Permanente alongside other companies reinsured by Hannover Re. It covers earthquakes in California, other US states and parts of Canada, Mexico and the Pacific.
Allianz to extend parametric crop cover with renewed Oko deal
Africa • Agriculture • Weather
Allianz has renewed its partnership with Oko, which designs and distributes weather index insurance products for smallholder farmers in Africa. Oko currently offers drought and excess rainfall insurance underwritten by Allianz in Mali, Uganda and Côte d’Ivoire and claims its product is the most popular crop insurance policy in Mali. With the renewed partnership, Oko and Allianz plan to offer the product in more African countries.
Etherisc partners with ARC on smallholder farmer coverage
Africa • Agriculture • Weather
Etherisc, which specialises in parametric insurance smart contracts, has partnered with the African Risk Capacity (ARC). ARC and Etherisc will collaborate on using blockchain technology for parametric insurance. The partnership begins with a programme to cover 4,000 farmers in Burkina Faso with local insurer Yelen Assurance.
WeatherPromise goes live with parametric weather protection
US • Travel • Weather
US-based WeatherPromise, founded in 2022, has launched its platform for parametric travel weather insurance coverage. WeatherPromise is partnering with travel partners to allow companies selling flights, accommodation, outdoor activities or events to embed parametric weather protection at the point of purchase.
Index insurance for coffee farmers extended to Guatemala
Guatemala • Agriculture • Weather
Blue Marble, a technology company which insures smallholder coffee farmers in Colombia and Kenya against excess and lack of rain in partnership with Nespresso, has extended the scheme to Guatemala. 114 farmers are being covered between April and November 2023, with capacity from insurer ASSA Compañia de Seguros.
India regulator plans parametric benefits in consumer insurance
India’s Insurance Regulatory and Development Authority (IRDA) says it wants to overhaul the consumer insurance market to make coverage more accessible to people with lower incomes. One of the innovations it is proposing is the wider rollout of parametric benefits within insurance coverage.
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