Parametrics and captives can turn carbon risk into a new asset class: Ryskex

By Henry Gale

May 21 - (The Insurer) - Parametric triggers and captive structures can turn carbon credit risks into a new tradeable asset class, Ryskex's founder Marcus Schmalbach told Parametric Insurer.

Parametric specialist Ryskex recently established a captive cell to underwrite reversal risks for the clients of startup asset manager Arx Veritas.

Unlike most other insurance for carbon credit reversals, it uses parametric triggers, which Schmalbach said are "clean, event-based and data-driven".

"That clarity is what gives institutional investors and ILS funds confidence," he said. "We've already seen ILS interest, but also engagement from hedge funds and impact-driven capital. Parametrics create a clear, quantifiable risk profile that can be priced and traded."

The parametric triggers include satellite-confirmed deforestation, revocation of credits by a registry or evidence of carbon stock degradation.

"These events are captured through remote sensing, cross-checked with registry data and processed via our parametric risk engine," Schmalbach said.

"Once the trigger criteria are met, the system initiates the payout – typically not in fiat currency, but in carbon credits of equivalent value."

By using a captive, corporations can access risk capacity from ILS markets. In this case, the captive cell uses carbon credits, instead of currency, as risk capital.

"That transforms sustainability assets into tradable financial infrastructure," Schmalbach said. "We're essentially building a new asset class."