STUART ASHWORTH: So, hello, and welcome to the Marketplace Insights podcast series. These days, there are few subjects as universally important as climate change. With emissions of greenhouse gases continuing to rise globally, time is short and the stakes are high. Stopping environmental damage is not enough, and we need to reverse the damage which has already been done, but that's going to require substantial investment. Now that is quite the mountain to climb, but the insurance market is actively helping to unlock some of this finance.
I'm Stuart Ashworth, the Head of Broking and Market Engagement for the Credit Risk Solutions division here at Willis. And to explore what Willis is doing to help unlock climate related funds, I'm being joined by Gabrielle Osborne.
So, Gabby, you've been at Willis for over 15 years in various different roles, but you join the Credit Risk Solutions team four years ago. And after various different things have taken on the important and fascinating role of helping our clients transition to net zero. So maybe some context-- we talk about investment and unlocking capital. So where's this capital coming from, and what is stopping or slowing down this investment?
GABRIELLE OSBORNE: Thank you very much Stuart. So firstly, in terms of capital, it's clear that all pools of capital are needed. It all needs to be harnessed. I mean, it will be obvious that a significant proportion of that investment will have to come from private capital.
I would say personally, that risk is one of the key reasons, which is slowing down investment into this sector, because I mean, as we're all very well aware, there are a lot of risks associated with financing climate projects, ranging from political risks, geopolitical uncertainty and also these new technologies are quite unknown. And even when the technology is more proven, there's concern about potential for losses on project finance and also broader lending activity.
STUART ASHWORTH: Excellent. So we are in the risk business. So that's great to hear. So what are Willis doing to actually de-risk these investments, to try and unlock this coverage?
GABRIELLE OSBORNE: So Willis facilitate placement of insurance, and the specialist insurance, which can help to de-risk this finance. So Willis work with specialty insurers and they provide credit risk, political risk, parametric and carbon insurance.
STUART ASHWORTH: So turning specifically to that carbon insurance. I mean there's a lot in the press around carbon. But what actually is carbon insurance? And which clients need this product the most?
GABRIELLE OSBORNE: So let's start from the very beginning for listeners who might not be quite as familiar with carbon credits. So on a very simple term, one carbon credit represents one ton of carbon that's removed from the atmosphere, either removed or reduced. And these credits-- a carbon credit can be generated from a nature-based solution. So for example planting trees or from a technology solution such as direct air capture and storage.
So carbon credits are financial instruments-- so they can be bought, sold and traded either through voluntary purchases or through mandatory compliance regimes. As in any financial market, there are risks associated with making these purchases or investments, and risks can occur during any part of the carbon credit life cycle. And this is where carbon insurance steps in.
So I'll run you through some of the new products within the carbon insurance market that have been developed over the last few years. So firstly, there's non-delivery risk. So that's the risk that the credits which were expected to be delivered are not delivered or under-delivered. So, for example, if there's a forest fire, the purchaser has not only lost the money that they paid for up front for the credits and also they haven't received their credits. So there are insurance products which mitigate against this risk.
There's also the post delivery risk. The credits have been generated, but something might happen to the credits after they've been delivered. So, for example, if there's a carbon reversal, the carbon is rereleased back into the atmosphere. Or also the credits might also be invalidated for certain reasons.
Next up, there's also political risk. So the risk that a host country might change its regulations. And that in turn could also impact the carbon project, the transaction or the sale of the credits. Also, there's the counterparty risk. So risk that parties in a transaction might default on the contract and not fulfil their obligations. What's quite interesting to note in these new carbon products is that the claims payment can be made either in cash or also in replacement credits.
STUART ASHWORTH: I was going to jump in very quickly on this. You mentioned that credits can be invalidated. So how does that actually happen?
GABRIELLE OSBORNE: So the carbon market is still a very nascent market. And the rules and regs are changing and evolving at all times. So, for example, it could be down to a specific government who decides not to recognize a certain type of credit anymore. So in a sense, your credit is invalidated, and null and void.
STUART ASHWORTH: And so what client base are we looking at? So who's most interested in this product?
GABRIELLE OSBORNE: So to be honest, the insurance can be bought by a whole range of different sectors. So on one side there's the financial institutions. So the lenders, investors, asset managers, anyone who's looking to insure their debt or their investments into carbon projects. And then on the other side, there's buyers of carbon credits, there's sellers, and there's also brokers of carbon credits.
Buyers of the credits themselves, that also can be across different industries. So it could be aviation, it could be construction, it could be marine. Essentially, anyone looking to reduce their emissions.
STUART ASHWORTH: So who are the markets that offer this cover? Now, these traditional insurers that we all and love are these new breed of specialist MGAs or existing MGAs.
GABRIELLE OSBORNE: So actually, Stuart, it's a mixture of all three. So there are firstly, the specialist MGAs who focus solely on carbon insurance. So they entered the market about just over two years ago. So the first MGA was Kita, followed by Oka and Artio. So they are solely focused on providing carbon insurance solutions.
And then there are your standard, more standard MGAs who are already writing different classes of business, who've expanded their range to also cover carbon insurance. So that's the likes of CFC Avondale. And then finally, there's a more traditional P&C insurers that we've worked with as Willis over many years, who now also can offer some of the carbon products that we mentioned previously.
STUART ASHWORTH: So obviously with these new entrants coming into the market, has there been product evolution? How has the market evolved? What's changed?
GABRIELLE OSBORNE: Yeah. So it's very much evolved, as you said. At the beginning, there was-- the insurers only offered one or two products. And over the last few years, it's expanded to a much greater range of different products. One notable product to highlight is that towards the end of last year, some of the carbon insurers can provide Basel compliant credit insurance to banks and other financial institutions.
STUART ASHWORTH: And obviously, Basel compliant credit insurance policies allow banks to reduce the amount of regulatory capital they hold, so they're able to do more.
GABRIELLE OSBORNE: Exactly. And then the idea is that then they will invest more into these climate projects.
STUART ASHWORTH: So the market's evolving. It's developing. There are new players coming in. But how deep is the market at the moment? And what are the projections for the next 3, 4, 5 years?
GABRIELLE OSBORNE: So the market is estimated to grow significantly over the next few years. So according to a report released by Kita, demand for carbon insurance is due to grow and the numbers estimated are between $10 to $30 billion of annual gross written premium by 2050. And this presents quite a unique opportunity to also have a positive impact.
STUART ASHWORTH: Oh, a positive impact indeed. I mean, it sounds like there is the requirement to help with this desperately needed investment. So it's really positive the market is coming up for this. That's amazing stuff. One final question is where can our clients and our colleagues learn more about this area?
GABRIELLE OSBORNE: So please feel free to head over to our WTW website and just search for carbon credit insurance.
STUART ASHWORTH: Wonderful. So that just leaves me to thank Gabrielle for her contribution to this episode of The Marketplace Insight podcast and we look forward to welcoming you to the next one.
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