Insurance has a crucial role to play in supporting carbon markets as the world continues its journey to net zero. A report estimates that by 2030, insurance premiums could reach around $1 billion and $10-$30 billion by 2050. The report, titled “Are carbon credits the next billion-dollar insurance market?” is a collaboration between Oxbow Partners and Kita. It highlights the important role of insurance in supporting the carbon market and provides valuable insights for industry experts.
According to the report, insurance can provide four key benefits to the carbon credit market. Firstly, it can strike a balance between traditional risk management practices and innovation, enabling improved access to finance to scale carbon projects. Secondly, insurance brings a stamp of confidence to the market and its participants through risk management and regulatory expertise. Thirdly, it offers a detailed assessment of carbon project risk, highlighting areas of concern and the need for wider risk management improvements. Lastly, insurance encourages market participants to take risks by taking on responsibility when things go wrong, which is necessary to release capital and scale carbon projects.
Industry leaders, including prominent brokers and insurers such as Aon, Howden, Marsh, AXA XL, CFC, Chaucer, and Fidelis, are optimistic about the market’s prospects and view its expansion as inevitable. Miqdaad Versi, Head of the Sustainability Practice at Oxbow Partners, expressed optimism about the market’s potential, highlighting its importance in facilitating green initiatives while generating profits. James Kench, Head of Insurance at Kita, added that the insurance industry is uniquely placed to help businesses and society navigate through uncertain times and called for embracing the carbon risk pool with purpose.
The report forecasts that the total addressable market for carbon credit insurance could reach about $1 billion in annual Gross Written Premium (GWP) by 2030, with a projected increase to $10-30 billion GWP by 2050. However, these estimates may underestimate the market’s full-scale potential as they focus solely on the voluntary carbon market (VCM) and exclude the compliance market. The global Compliance Carbon Markets were valued at over $800 billion in 2023, and the VCM was valued at $2 billion in the same year, with estimated deals worth $10 billion executed. Long-term predictions for the VCM range from $10 billion to $250 billion by 2030, with some expecting the market to exceed a trillion dollars by 2050.
The report highlights that the insurance industry has a broad spectrum of opportunities within the carbon market sector. This includes specialized insurance for carbon credits as well as traditional insurance lines necessary for carbon projects and businesses operating in this sector, such as construction, property, casualty, financial lines, and marine insurance. The authors of the report took a conservative approach in estimating the potential market opportunity, discounting the potential impact of regulatory mandates requiring insurance and the merging of both markets. However, factoring in the additional investment required to produce carbon credits themselves could potentially result in a multiple of 3-5x if applied on top.
The rapidly evolving carbon markets present a complex landscape with unique risks and challenges. The presence of insurance within these markets is crucial for their exponential growth. Insurance mechanisms can effectively address risks, enhance confidence among investors, and stimulate increased investment. This, in turn, will enable the markets to scale at the necessary rate to align with global emission reduction targets and combat climate change effectively.