1. Actuarially-driven risk assessment
Insurance has developed an actuarial toolkit to underwrite the risks associated with carbon credits accurately. These models are enriched over time with a more robust claims history. They provide clarity and transparency to a nascent market.
2. Reduced contract risk for buyers
Insurance reduces contracting risk by transferring the risk of asymmetric information from the insured to the insurer.
3. Shortened due diligence cycles
Insurance shortens due diligence cycles by reducing the onus on carbon credit buyers to assess the underlying risk in-house. Credit buyers are less equipped to assess those risks than a specialized insurer. Today, increasingly lengthy due diligence cycles deter many players from entering the market, as they don’t believe they can assess quality and do not want to shoulder the reputational risk of getting it wrong. By transferring the risk from the buyer to the insurer, insurance places the onus on a specialized party with the right risk-assessment capabilities.
4. Reduced balance sheet risk for buyers
By transferring the risk from the insured to the insurer, insurance reduces balance sheet risks associated with credit purchases. If a reversal or invalidation event were to happen, the insurer would replace the asset, making “whole” carbon purchases.
5. Better reputational guarantees for buyers
Insurance improves buyer reputation by protecting against risks associated with credit underperformance. If a loss event were to occur, the buyer could still stand behind their offsetting claims, as claim payouts would enable new carbon credit purchases.
6. Quality signals through guaranteed wrappers
Insurance could command a higher margin for and provide an important quality signal to the market for wrapped credits. Risk-averse buyers are likely to select an insured credit over an uninsured one. From a commercial perspective, this becomes an important competitive advantage to market intermediaries (e.g., developers, brokers, marketplaces).
7. Released buffer pool credits
If buffer pool contributions are partially or totally replaced with insurance, the developer can sell a larger percentage of the credits they produced. This would positively impact their cash flow and the project unit economics, particularly in the earlier years, as they would not necessarily have to internalize the entire cost of the buffer pool upfront before selling the credits. Equally, this immediately provides additional carbon credits in a supply-constrained market.