‘The potential is big’ – Kita on the rapidly expanding carbon credit insurance market

The carbon credit insurance market could be worth $30bn a year by 2050, according to Kita head of insurance James Kench.

Speaking on the Voice of Insurance podcast on March 5, he said: “We think the potential is big because of the climate maths that is stacking up against us.”

Outlining the future size of the market predicted by banks and consultants, he said: “We think it could be up to $1 billion of premium per year.

“And then by 2050, that’s the real scale, it’ll be about $10bn to $30 billion per year.”

Kench was speaking alongside Natalia Dorfman, CEO and co-founder at carbon insurance firm Kita.

How it works

Carbon credit insurance works by paying claims in cash or replacement carbon credits to policyholders who suffer a loss. Carbon credits are passed to corporations and organisations that show positive action in offsetting and minimising carbon emissions, such as the planting of trees. However, they could lose their carbon credits if the assets, such as the trees, suffer physical deterioration or the tree project is not completed because of fraud and incompetence.

Other risks are from governments blocking carbon credits or nationalising assets.

Asked by podcast host Mark Geoghegan how carbon credit insurance works, Dorfman used the example of tree planting and added: “We all expect some fires to happen to those trees and the resulting carbon credits projected, to take that into account.

“So, we feel insuring the resulting carbon credit is a safer bet than insuring the underlying physical asset.”

Environmentally friendly companies that are allocated carbon credits, such as an electric car firm, can also sell their credits. This means there is a carbon credit market for all parts of the market – the sellers of carbon credits, the buyers of carbon credits and intermediaries.

Investors in carbon credits

Carbon credits are also acquired by investors speculating on the product as a tradeable asset, with a view to making gains on price movements. Geoghegan pointed out that this means carbon credits could fluctuate in worth, like any tradeable market asset.

Kench said it was a ‘key concern,’ adding that settlement figures are calculated on an ‘agreed value policy,’ meaning policyholders get paid on what the credits are worth in market value at the time of the insurance contract.

On multi-year policies, there is the capability to increase and review limits over time depending on where the market is, Kench added.

Kench described Kita, which is a Lloyd’s coverholder, as a ‘classic bespoke underwriting model.’

Kita directors’ backgrounds

Explaining her background, Dorfman said she studied environmental science at university and worked at law firm Clyde and Co, where she learned about Lloyd’s specialty insurance and became ‘a huge advocate of how important insurance is to the global economy.’ Dorfman was Clyde and Co’s lead strategy for the climate risk practice, providing the foundation for her transition into founding Kita.

Kench was a biochemistry graduate with a ‘passion for ecology.’  He was an attorney before going on to hold senior roles at broker JLT and then portfolio leadership responsibilities at Marsh.

Future plans

Dorfman was optimistic about the potential for the carbon insurance market’s growth. At some point, Kita will need more funding.

She said: “So we did a seed round in December 2022. And we have a pretty low-cost base.

“So, we are pretty well funded. But yes, at some point we will certainly be needing more investment, in particular, to build out that capacity side, definitely. That’ll be something we’ll be looking at the latter half of this year.”