Insuring credits to make carbon market credible

“I, on a personal basis, was drawn to actually try to get out of insurance,”Chris Slater, chief executive of specialty insurer Oka, says.

Slater spent more than a decade building an online commercial insurance retailer, Simply Business, which was sold to Travelers in 2017.

He started a second business in the niche, but growing, market for carbon credit insurance. Taking its name from a word in Tupí-Guaraní languages that means “home”, Oka was established at the turn of 2023 and, once it had received regulatory approval, began selling insurance policies from January 1 of this year. 

In an interview with Insurance Day, Slater says he came back to insurance to help “solve one of the existential crises of our lifetime” by using his industry experience. “And I think young kids do that for you,” he adds.

His company is one of a small group of new entrants that provide cover in the voluntary carbon market, where corporations trade various privately sourced credits that – at least nominally – represent a tonne of carbon removed or not emitted into the atmosphere.

By providing cover for carbon credits in the private, voluntary carbon market, insurers like Oka can signal to corporate investors that the credits are solid assets, smoothing the entry of new capital into carbon abatement more generally.

The carbon market in 200 words

Governments first established emissions trading schemes (ETSs) in the late 20th century, first to fight acid rain and then global warming. Many governments, including the EU, California, South Korea and several Canadian provinces, operate regulatory ETSs covering certain polluting sectors.

More recently, a voluntary market has developed, in which private actors can purchase credits tied to various projects that compensate for carbon emissions. Many promise to avoid carbon emissions that would otherwise be released – called avoidance credits – while others offer to actively capture carbon by planting forests, sequestering CO₂ in the ground or using carbon capture technology.

Carbon credits normally equal one tonne of carbon dioxide. Voluntary credits are not usually accepted in official ETSs, but this is beginning to change – Slater says that Singapore is beginning to permit the use of some voluntary credits and some insurers in the field expect the voluntary and mandatory markets to converge in the near future.

Insurers have only begun operating in this market in recent years. Slater estimates there are about $100m to $200m in gross written premiums (GWP) at present. In February, Kita, a Lloyd’s coverholder that offers carbon insurance, co-published a report with Oxbow Partners predicting the market will reach about $1bn in GWP by 2030.

The birth of Oka

Oka is a primary insurer that writes its own policies. Slater decided to establish a “full-stack insurer” rather than an agency because he wanted to be able to tailor the product. “This is a new market, and because it’s fast, evolving, real, you need control over product, you need to be able to build product that meets customer demand,” he says.

At Lloyd’s, Oka operates syndicate 1922, a “syndicate-in-a-box” managed by Asta. Lloyd’s granted syndicate 1922 preliminary approval last October, followed by final approval in early January.

Slater says Oka turned to Lloyd’s to take advantage of the high-quality capital and “technical and specialist knowledge”, and also because the market has a global reach. “I think writing these risks anywhere else would have been a little less straightforward,” Slater says.

One of Oka’s rivals, Kita, also operates in the Lloyd’s market as a coverholder, in partnership with Chaucer. The two companies began their partnership in the Lloyd’s Lab.

Oka operates through a managing general agent in the US market, and Slater says the US was initially meant to be Oka’s primary market. However, Lloyd’s allowed Oka to extend its business elsewhere: the firm also operates, or will soon operate, in the UK, Australia, Canada and the Bahamas, with plans to enter the EU market as well.

What Oka insures and how

Slater says Oka’s business focuses on “post-issuance” coverage, insuring the carbon credit itself in case it becomes incapable of representing a tonne of withdrawn or unemitted CO₂. This could happen, for example, from the failure or destruction of the under­lying carbon abatement problem – a forest burning, for example.

This contrasts with competitors such as Kita, CarbonPool and CFC, which cover or plan “pre-issuance” coverage for the carbon-mitigation projects themselves, to facilitate them producing the credit.

Slater compares Oka’s insurance to a warranty. “We insure the credits, we show the serial number, and if something were to happen that impairs that credit, we effectively pay out,” he explains. The insurance payment can go to either the issuer of the carbon credit or to the purchaser.

Oka has “had over 300 conversations and quoted over 70 projects over the last three months”, Slater says. In March, Oka announced it would insure credits produced by an Oregon biochar producer, which manufactures a carbon-absorbing material similar to charcoal that is used to enrich soils.

Slater says Oka has reinsurance backing through what he calls “a fairly typical quota share agreement”, with Liberty Mutual as the lead reinsurer.

Cash or carbon

Carbon market insurance is somewhat unusual in that some carriers offer, or plan to offer, to pay out claims in other carbon credits.

Kita offers such policies in some cases, though it pays out cash in others. Switzerland-based CarbonPool will primarily pay out claims in carbon credits once regulators in that country grant approval, arguing carbon credits can be difficult to replace on open markets.

Oka pays out in cash. Slater explains that “credits today aren’t fungible… the market hasn’t been designed for that”. A carbon credit may be worth one tonne of CO₂ in theory, but their precise valuation can be debatable.

Slater says corporations often choose carbon projects because they are located in specific regions, meaning the credits have a non-commercial or reputational value. It would be very difficult to source credits from a narrowly defined region, Slater says.

Finally, carbon credits are an asset, which means they carry the risk they will devalue and undermine the financial health of the insurer.

One of the reasons Slater wants to extend insurance coverage in the carbon markets is precisely to stabilise the value and credibility of carbon credits.

The policyholder can use cash from on Oka policy to buy new carbon credits in the market, Slater explains. However, they can also choose to use the policy payout to settle regulatory or legal claims deriving from its failure to meet environmental rules or commitments.

The bigger picture

Slater believes corporate buyers may hesitate to purchase credits because of the market’s fungibility problem – it is difficult to know whether one credit really equals one tonne of CO₂. “I think specifically for the carbon market, what I worry more about is ensuring that insurance is providing that signal of quality,” he says. This can in turn draw liquidity into the market.

“What I’m hoping for is that our insurance and our peers’ insurance can help really unlock demand [and] bring that confidence,” he says, adding he especially wants to draw in buyers from the financial sector. Banks and other financial sector players “can really move the middle market into making the commitments that can drive carbon out of the atmosphere”.

However, the carbon market will not be a substitute for government regulation, including hard caps and bans on greenhouse gas emissions. “Carbon markets are not the silver bullet,” Slater concludes.