Forestry plantation and vegetation regeneration project owners are buying parametric insurance to preserve the value of their investments’ carbon credit units against the risk of bushfires.
Ben Qin, Descartes Underwriting’s head of North Asia & Australia, says the underwriting agency has built a substantial portfolio of timber, forestry and bushland regeneration clients in Australia.
Their projects are eligible for Australian carbon credit units (ACCUs) issued by the Clean Energy Regulator for greenhouse gas (GHG) abatement activities conducted as part of the Federal Government’s Emissions Reduction Fund.
Each ACCU issued represents one tonne of carbon dioxide equivalent stored or avoided by a project. ACCUs are tradable commodities that can be sold on a secondary market or contracted to third parties, for example, oil and gas or mining companies, to offset their GHG emissions.
Eligible projects must be registered and comply with strict guidelines.
Mr Qin says parametric insurance appeals to timber, forestry and bushland regeneration project owners because it provides a transparent, simple policy that pays quickly when a triggering event occurs, such as a bushfire.
“Loss detection is powered by high resolution satellite imagery, enabling better accuracy than traditional on-site assessment. We continuously monitor clients’ plantations or regrowth projects during the risk period,” Mr Qin says.
“Fire losses across the entire risk period, usually 12 months or the bushfire season, are aggregated in calculating a client’s payout. If the hectares of burnt area and consequential losses exceed an agreed deductible, we pay up to the limit. The policy enables clients to secure their ACCU inventories and maintain financial liquidity.”
Descartes wrote its first policy for an Australian forestry plantation client in 2020 and its first carbon credit specific one in 2022, however, the Paris-headquartered company has been writing parametric insurance internationally for timber investment management organisations (TIMOs) for many years.
“Without insurance, a TIMO can lose its main income stream if there is no asset to generate carbon credits. Traditional insurers may consider covering the loss of the timber’s value if it is burnt, but we cover the financial loss of the ACCUs and/or the replacement value of the timber,” Mr Qin says.
In seeking coverage for the growing exposure, forestry and regeneration project owners find capacity constraints and market hardening can hamper traditional offerings. Descartes offers substantial capacity of up to $200 million.
Mr Qin says the market price for ACCUs increased after the election of a federal Labor government, because that generated greater investment in projects that attract ACCUs, including solar and wind farms.
However, the bushfire risk is likely to increase next summer because the Bureau of Meteorology has predicted a 50% chance of El Niño developing, which is about twice the average likelihood.
El Niño is characterised by hot, dry weather in parts of Australia, factors that historically have been observed to correlate with increased bushfire risk.
Descartes Underwriting has 14 offices globally in Australia, Singapore, Hong Kong, Japan, the United States, Spain, Germany, Latin America and the United Kingdom.
The company writes parametric insurance for natural catastrophes, non-damage business interruptions, crops and renewable energy operations globally. The coverage offers quick payouts once triggers are met, with no requirement for loss adjusters or in-depth claims analysis.
Released by: Kate Tilley, Descartes Underwriting Australia Communications Consultant
P: (07) 3831 7500 E: firstname.lastname@example.org