Kita’s Dorfman: Growth in carbon insurance crucial to delivery of offset solutions

The insurance industry must enhance its footprint in the carbon offsetting space by financing solutions made possible with more readily available pricing data to help accelerate the removal of carbon from the atmosphere, Kita CEO Natalia Dorfman has said.

Speaking to The Insurer TV, Dorfman explained the insurance industry has a pivotal role to play in empowering clients with tools that will help them achieve their carbon offsetting targets.

By financing such solutions, the industry can help to grow the voluntary carbon market more rapidly.

“The role of the insurance industry isn’t necessarily around dictating the price of carbon, our role is actually how do we enable more and more tonnes of carbon to be captured from the air,” Dorfman said.

“The way you do that is by enabling the growth of the carbon removal solutions that are going out and capturing that. And I think that’s where we, in this market, sometimes get into challenges in terms of understanding. There’s always a lot of talk about carbon offsets, but what we’re really talking about here is carbon financing,” Dorfman added.

She explained that providing insurance solutions to accelerate carbon offsetting would consist of enabling clients to deploy solutions as simple as planting and maintaining trees.

But there are other solutions, which would consist of helping clients adopt the manufacturing facilities to trap the carbon in the atmosphere.

By insuring these projects, the industry is helping reduce the risk in upfront financing of these projects, which should accelerate the growth of carbon offset solutions.

“Right now, because there isn’t insurance available, that upfront financing really sits on balance sheets – equity financing – and that just has a cap in terms of size… whereas if you can insure that risk, insure that financing, all of a sudden you can get better terms of financing that enables more upfront financing for carbon removal to scale,” Dorfman added.

By supporting its clients in financing these projects, Dorfman said the carbon insurance market could develop in a way it could function similarly to a “proper commodities market”, or the solar or wind markets.

The carbon credits market has the potential to grow significantly. Estimates indicate this market could reach between $20bn and $50bn by 2030, suggesting opportunities for insurers in this space.

Dorfman explained these estimates are based on calculations around the amount of carbon that is necessary to remove from the atmosphere and how much it would cost to do so.

Pricing challenges

As with other nascent markets, a lack of loss experience and readily available data can create a challenge when it comes to pricing a risk, but Kita’s Dorfman said there is enough data to provide guidance towards a “clear pricing strategy”.

“In an unexpected way,” she said, “data availability in the voluntary carbon market is actually reasonably high.”

This is because voluntary carbon market projects are certified by one of the carbon standards, and to certify such projects information must be made publicly available on registries that monitor these standards.

In addition, there is abundant data that can be extracted from the timber markets, she told The Insurer TV, shining a light on certain elements of the cycle, such as afforestation and reforestation related to the trees that are absorbing the carbon.

“Timber insurance is an established market, and the data it can provide facilitates insights into development of carbon projects,” she said.

Dorfman said that Kita also uses data extracted from satellite imagery and other remote-monitoring technologies to monitor the progress of these projects.

The buyer of carbon credits that is looking to be insured is also a source of reliable carbon data, and sometimes the data a carbon broker has compiled as part of due diligence on the projects.

“All of these things, in our perspective, bring us enough data to be able to effectively price an insurance that we’re comfortable selling. I think the data availability will, of course, get better and better, but somebody needs to be a first mover in insuring this market to enable it to scale at the rate I think we – the world – need it to,” Dorfman noted.

“World’s first” carbon insurer

Kita claims to be the world’s first carbon insurer and is dedicated to providing solutions to the voluntary carbon markets, with a mission to enable more high-quality carbon removal solutions.

Over the past few years, climate has become one of the main topics of discussion across all industries as scientific evidence increasingly points to higher global temperatures as a result of carbon being released into the atmosphere.

Dorfman was speaking to The Insurer TV at the same time as the COP27 meeting in Egypt, where a new report published by Global Carbon Project said global CO2 emissions from fossil fuels and cement have increased by 1 percent this year, bringing emissions to new record levels.

The (re)insurance industry has sought to help address this issue and to support its clients in reaching their net-zero targets.

Kita has been working closely with Lloyd’s to develop its product and has secured coverholder status. It will begin writing business in January.

According to Dorfman, the Lloyd’s market has been “fundamental” in supporting Kita and developing its ideas and products. Four months after its launch, in April this year Kita was accepted into the Lloyd’s Lab.

“We had the opportunity to come into Lloyd’s and be mentored via many very, very experienced people within the Lloyd’s market. They helped steer us significantly from our early thinking. We came into two early insurance ideas, they helped steer us towards where we are now, they helped work with us to make sure we actually understand the risks and the terminology and how they view risk versus how we view risk. And then very importantly, they backed us,” Dorfman said.

Opportunities to get involved

Dorfman explained there are other risks against which the industry can protect its clients across other parts of the cycle.

For instance, there are risks associated with the development of the projects, such as afforestation, reforestation, tree maintenance and other aspects related to carbon offsetting.

But there are also political risks associated with the location of the projects, as well as expropriation licence risks relating to the host country where the projects are being developed.

Dorfman also cited fraud and negligence risks, for which Howden recently launched a product. It protects against fraudulent projects that would invalidate the resulting carbon credits.

There are also delivery risks, which is where Kita positions itself in the carbon offsetting cycle. Dorfman stressed that this is an extremely important area that insurers must address because offering a safety net against the uncertainty of the delivery of carbon projects will help accelerate the market’s development.

According to Dorfman, Kita’s product is “protecting the timeframe between the financing and, in essence, the receipt of the product that you’ve paid for”.

“After assessing all of those risks that we could insure, we came on to carbon delivery risk because we thought that was the really key risk that blocks that upfront financing that carbon projects need today so they can get to that [$20bn to $50bn carbon credits market] size in 2030,” Dorfman concluded.

In this 14-minute video, Dorfman discusses: