Captive cell uses carbon credits as capital to underwrite reversal risks

By Henry Gale

May 19 - (The Insurer) - A captive insurer has been permitted to use carbon credits, instead of currency, as risk capital to underwrite the risk of carbon offsets being reversed.

The proof-of-concept is a collaboration between startup asset manager Arx Veritas and parametric specialist Ryskex, whose founder Marcus Schmalbach told Sustainable Insurer that captives are well-suited to manage carbon credit risks.

"Retaining the risk inside a captive enables firms to actively manage climate and carbon-related exposures with full control over capital, structure and payout logic," said Schmalbach. "More importantly, in our model, carbon credits themselves become the capital."

With carbon credits as risk capital, reversed credits can be reimbursed with equivalent credits without exposing the insurer to volatility in their price. This is the first reported example of carbon credits being used as risk capital within a captive insurer.

It is only possible because a captive jurisdiction has approved the use of carbon credits as risk capital for the initiative. Ryskex is also discussing the concept with other jurisdictions.

In this case, Arx Veritas is "renting a cell" from Ryskex, meaning a segregated account within Ryskex's captive is acting as a captive insurer for Arx Veritas. The captive cell is underwriting the risk that the offsets represented by carbon credits Arx Veritas' clients invest in are reversed.

"The current proof-of-concept is built around voluntary carbon credits – with a strong emphasis on high-integrity, independently verified units," said Schmalbach.

"That said, the technical model is fully adaptable to compliance markets, especially as regulatory frameworks develop. Given the direction of the global carbon economy, we see the convergence of voluntary and carbon markets not just as likely, but inevitable."

Schmalbach highlighted the expansion of the European Union's Emissions Trading Scheme to more industries in 2027 as an opportunity to expand this model.

"The 2027 expansion will bring in new sectors like maritime transport and potentially agriculture, industries with dynamic, carbon-intensive exposures that haven't previously operated under cap-and-trade mechanisms," he said.

"These sectors need new forms of risk transfer, especially where traditional insurance has failed to provide tailored coverage."