Hello, everybody, and welcome to another edition of C&F Talks. Today, it's a great pleasure to have with me George Beattie. He's Head of Innovation at CFC, which is a specialist insurance company. George is going to be speaking at our International Carbon Markets Summit, which is being held in London on the 29th of May. George, welcome.

Thanks for having me.

It's great to have you with us.

Perhaps we could start by just talking about the role of insurance in the carbon markets. What is the problem that insurance is the solution for in these markets?

Sure. Well, to start at the top, the insurance industry has long had an uncomfortable relationship with innovation and an uncomfortable relationship with climate change. We've been, as an industry, repackaging what we've been doing for a very long time and calling it innovation and calling it a new product that can meet the needs of the climate transition, but actually not much has changed. And so, at CFC, our mission is to try and do things differently.

And when we looked at this market, we looked at the problems that different parts of it face. The problems within the carbon market felt very acute. And the issues faced by counterparties in the carbon market felt like things that the insurance market has been addressing for a long time.

Things like political risk, things like natural catastrophes, these are all things that actually the insurance market is quite good at looking at the data for, collecting data for, looking at the data for, and assessing risk. And so really what we wanted to do is get involved in that market and try to facilitate transactions happening better, with higher fidelity, with more trust. So, what we felt is insurance can be a powerful proxy for quality.

It can never be a rubber stamp and we would never want that to be the appearance, but it can be a powerful proxy for quality, where we have an important third party coming in and having done the review saying actually, we think this project is of high quality and therefore it's insurable. And our hope is that's going to add a lot of trust for both buyers and sellers in the market. And we've got a range of products that we can talk about that help meet the needs of different participants in this marketplace as well.

Okay.

So just breaking down, what are the different elements that you're seeking to cover, you know, quality you say is one and ensuring trust. So how does this work? We're in the value chain of the carbon markets, can insurance help?

Sure, so the way that we look at this is as a logistical problem. So, we have a product that's being produced by a product about the simplicity of the sellers, and then we have a range of different buyers who are concerned about a few main things. You know, one is, am I going to get the product that I promised?

That's particularly important if it's entering into forward buying arrangements, where they're essentially putting up money up front in order to receive credits in the future. And of course, there is then the risk of interdiction of that delivery due to a whole range of issues that are insufficiently captured or not captured at all by the contractual process. So, for example, a supply contract on a forward basis will typically exclude force majeure events, so the natural catastrophes, leaving the counterparties with really no recourse with which to solve the problem.

So one of the first things we did was deliver a delivery insurance product that says to the buyer of the credits on a forward basis, if you do not receive what you have been promised, we will repay you an amount that's equal to the number of credits you have not received, multiplied by the unit price you paid up front. So, it's like a refund mechanism, and it's not a liability mechanism. So basically what we're saying is you've got your contract, that's great, but actually the way this policy works, as the policyholder, tell us that you have not received what you were promised, arising from any cause, and we will pay you an amount that puts you back on track, an amount of the initial investment.

So, we don't capture market risk or price risk, but we will refund based on their initial investment. So this is a very powerful and very simple mechanism that says to the counterparties, to the buyer at least, I need to do the contractual process as I would normally do and make sure my interests are protected there, but I have this very powerful policy sitting off to one side that means that if I don't get what's promised for any reason, then I'm going to get repaid by my insurer. And that adds a huge amount of certainty into the situation, especially because we're addressing political risk and natural catastrophes and failure of the science, a range of other things in one place. And this should help for people to go a bit faster in their dealmaking.

The next product we introduced was essentially saying, okay, when you have your credits, the risk doesn't go away. Particularly for nature-based projects, we have cancellation risk that occurs broadly because of reversal, meaning damage to the asset that produced the credits, or due to invalidation, which is some kind of legal challenge or change, or perhaps a relabelling or the removal of a label that attaches to those credits that denote some kind of use case.

For example, if credits lose their CORSIA label, then there's a loss to the party that holds them. So, the cancellation policy is equally simple. It says, if any of the credits you hold in your possession are cancelled, rising from any course, we will repay you an amount that's equal to the number of credits cancelled multiplied by a pre-agreed amount per credit. And that's scheduled in the policy. So, it's really straightforward. There's no horrible adjustment process like there is normally with insurance policies. Everything's kind of pre-baked.

So, the point here is speed. How do we pay really fast to get people back on track? So those are the first two products we came up with. We've got another three. We probably don't have time to talk about those today, but we've got a lot going on and we innovate very fast.

Okay. And what's been the response? These are aimed at obviously corporate buyers of carbon credits. What's the response been in the market so far?

So, the response has been astounding. Working in innovation and insurance, which I know sounds like an oxymoron, is really tough. And one of the biggest problems we have is coming up with really smart insurance products that no one wants to buy.

And what we've been struck by with this market is firstly, how little education the market requires on these topics. So normally in insurance innovation, you turn up at a buyer and you say, here's a risk you didn't know you were exposed to. Let's make it all make sense to you and hope you paid the premium. Whereas in this market, this is really insurance facilitation. So, it's not insurance as a tax, it's insurance as a facilitation. It helps people go from A to B.

So, we come into a transaction, and you've been negotiated for six months and unable to get over who owns the risk of government intervention. For example, a project based in an emerging economy, the buyer will be looking at it and saying, we don't know how to navigate the political risk yet. How do we get the deal done?

The policy comes in and says, we're going to capture that for you. It just speeds things up. So, the response from the market from both the buy side and the sell side has been extremely strong because both of them see the value of the insurance.

So, what's been really interesting is we get a lot of recommendations from both the buy side and the sell side to talk either way as we get brought into all conversations in order to play our role. And that's been fascinating. We started off serving these policies solely to buyers, but now we've evolved to provide certain solutions for sellers, for projects themselves as well.

So, whether a project is looking at, how do I sell more credits on an offload basis? Or what do I do about the credits I have in my inventory that I haven't sold yet? Or how do I get debt out of the banks that don't understand carbon and don't want to lend to us?

Is there an insurer that can step in and offer credit insurance to them to make me more attractive as a debt prospect? These are all types of questions that CFC can step into and start to answer. That's a very powerful remit. Really, it doesn't matter who the participant is or what they're trying to do. We have a solution for a lot of these different circumstances. So yeah, we've just been completely swept off our feet basically with incoming interest.

That's been fascinating. That's very good news.

I mean, I know that you emphasise underwriting the carbon projects and not the policyholder. What does that mean in practice?

Well, this won't be interesting to many people outside of insurance, but it is interesting to insurance people. So, I'll start there. Most insurance policies are offered to entities and the entity that receives the policy is the risk.

So, if you offer a cyber insurance policy that broadly protects an entity against the risk of hacking by bad actors, you're looking at their security credentials, you're looking at their ability, their resilience against that risk in order to understand the risk and grant them that policy. In this case, what's really unusual is that if we are granting a policy to a buyer of credits, they actually have very little bearing on the risk we're taking on. It's all about the project, which makes it very interesting from an insurance perspective, because when we built the very good view of a project, we have a rate for each of our insurance products.

And then depending on the entity that comes to us and says, well, I'm seeking exposure to this project of this nature, it's either a spot or a forward transaction or perhaps the bank to lend, we have the rates immediately available. So, no application forms, no normal insurance nonsense, no poking around within the contracts. We can just say, well, the rate on that is this. So, the price of the premium is this. And by the way, we have X capital available for the time being to do this transaction. So, it's first come first serve thing.

We have $25 million of exposure that we can take on per project at the moment. That's set to increase quite shortly. So really, it makes it very, very fast and very interesting because we can be among the first people to confirm what we can do in a transaction structure.

So that's really fascinating. And our world view remains that of 29,000 projects out there in the world, a small proportion of them are insurable because they represent the very best of the industry. Because insurer's role should be to support the very best of the industry.

Because as a proxy for quality, what we want to see is that cohort doing the science really well and running the business really, really well. We want to see that bit grow to be the whole market. And indeed, that small cohort that's doing things really well has to be the whole market in the future for the market to be a thing at all.

So, we take that responsibility very seriously. So, this is not about insurance for everybody, every project. This is about ensuring the very best ones in order to fuel that growth more.

So that's been very fascinating. As I mentioned, we can serve policies to project developers themselves. If they're concerned about yield deviance in credits, for example, we can insure them against that. So, there are lots of different ways that we can approach these situations.

Yeah, absolutely fascinating. I mean, so really insurance is a catalyst to the evolution of the voluntary carbon markets.

You mentioned that you're going for a smaller cohort to prove the concept and then it goes wider. How do you see the world of insurance as the market develops and carbon markets mature, and the risks of climate are better understood, and more people turn to carbon credits? How do you see the role of insurance developing in the years ahead?

Well, I think it's semiotic. There are some observers that say that the requirement for insurance will drop off as the market becomes more sophisticated. But I don't necessarily buy into that because I believe that these exposures, these fortuitous exposures will remain.

And indeed, a lot of them are getting worse. So, the climate change disaster, which this market is designed to resolve, is getting worse. So even in 20 years with a lot more oversight, a lot more certainty around what regulations look like, a lot more intergovernmental support mechanisms, like Article 6.4 and those types of things, you are still going to have the uncertainty of what can happen on any given day on a fortuitous basis to a project. Particularly nature-based projects where things are invariably uncertain because we're dealing with natural assets and natural assets will continue to be able to burn, to be able to be destroyed for all of history. That's not going away. So, I think the growth of the insurance market in this context is symbiotic with the growth of the wider carbon market.

As the carbon market grows, the insurance market for carbon will grow. And I think penetration of insurance within the carbon market will be very high because at the kind of rates that we are offering, it makes huge economic sense to bring insurers in as a third party to make a transaction safe, to add certainty to a transaction. But I don't see that going anywhere.

As long as insurers keep their rates as tight as possible, they are adding a massive amount of value. And I think it's the property values we've mentioned through this interview. I think that's incredibly positive. And there are few alternatives to that. Carbon credit rating agencies, very powerful, very good source of intelligence. But there's a lack of so what there.

If your credit in the future has a triple A rating, it doesn't protect you in the event something goes wrong. Whereas insurance does. So, I think there's a combination here of assurance and then insurance that goes hand in hand that will lead to the future state of the market.

And it depends what future state you buy into. Certainly, we lack any real tools to fight climate change that are as real as this one. So yes, there have been teething pains, but show me the other tools that we have at our disposal as a species to ensure that we protect natural assets and that we move corporate capital in the right direction. There aren’t.

So, in our view, our house view, this will become a carbon price question for all businesses of all sectors and all sizes. CFC has built its history on serving SMEs, so small businesses. And we believe in the future that will be the case for carbon.

We're starting off with quite big risks because that's the way that capital is moving right now. But in the future, we believe this gives way to a semi-compulsory market represented by a carbon price where insurance will be integral. Because an SME won't be able to afford any kind of movement on the carbon contracts.

If they're spending 100K a year on carbon credits, they're mandated to buy, they simply will not be able to afford them either not being delivered or being cancelled out from under their feet. The future of this is not a donor marketplace or a feel-good marketplace. It is a mandated marketplace. And we can see examples of that already with different compliance crossover use cases like CORSIA, Singapore Taxi, those types of things.

Yeah, I suspect you're correct on all those points. I think the demand can only continue. Sadly, George, we're out of time.

To our viewers, if you'd like to hear more on this topic of related issues, do go and have a look at our website, www.cityandfinancial.com for further details about the International Carbon Markets Summit coming up, as I said, on the 29th of May in London. We'd love to see you all there.

George, thanks very much for sharing those thoughts.

Thanks for having me.