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Lloyd’s Insurer Selling Policy Against EU Flip Flop on Carbon

A Lloyd’s of London insurer is offering carbon traders coverage that would pay out if the European Union changes its mind again on the emission credits it will accept in its cap-and-trade market, the world’s largest.

Kiln Group Ltd., a Lloyd’s insurer owned by Tokio Marine Holdings Inc. (8766) of Japan, began selling policies last month that may pay traders in the event European regulators propose or pass new eligibility rules, said Julian Richardson, chief executive officer at Parhelion Underwriting Ltd., an adviser to Kiln.

“We can define the trigger” to suit the premium the client is willing to pay, Richardson said in a May 5 interview from London. A regulatory proposal would usually come several months before rules take effect in the carbon market. Eligibility risk insurance might cost about 3 percent to 8 percent of the sum insured, Richardson said. The price might be higher for policies covering more risk, he said.

The European Commission proposed a ban starting in May 2013 on credits from projects that cut hydrofluorocarbon-23, a greenhouse gas that can trap 11,700 times more heat per molecule than carbon dioxide, to curb “exorbitant” returns. The ban will probably become law later this year, based on usual timeframes for approval by regulatory bodies including the European Parliament.

“We want the clients to tell us what keeps them awake at night,” said Thomas Hoad, underwriter in the enterprise risks division of Kiln. The policies “will encourage more investment in climate-change projects.”

Ban ‘Threatens Value’

Kiln’s policy “can be a useful product, especially for a portfolio that’s not very diversified,” said Adrien Assous, chief economist of carbon markets at Natixis in Paris, which invests in greenhouse gas credits. It’s difficult to know which projects, if any, may be banned next, Assous said. “I don’t know the hierarchy in the commission’s blacklist.”

The HFC-23 ban, signaled by the commission in May last year, threatens the value of 30 billion euros ($43 billion) of credits, Miles Austin, a spokesman for the Carbon Markets & Investors Association in London, said in February this year. The UN has approved projects tied to 3.6 billion euros of such credits since 2005 based on last week’s prices. That’s 45 percent of the total in the UN emissions market.

December 2010 futures fell as much as 22 percent to 11.35 euros a ton on Dec. 10 from 14.53 euros on May 3 last year, according to data from ICE Futures Europe in London.

The EU Climate Change Committee, which includes representatives of the bloc’s member states, recommended the ban on Jan. 21 this year. Since then, the December 2011 permits have jumped 19 percent to close at 13.03 euros last week.

Unspecified Bank

Kiln sold last month what it calls the world’s first carbon-credit-eligibility risk product to an unspecified international bank, it said. The insurer declined to say whether the bank was protecting its existing portfolio of credits or a new transaction.

The policy sold pays when any new ban comes into force, said Laura Guerin, a Kiln spokeswoman in London. While Kiln may consider covering a policy that pays when the Brussels-based commission makes a proposal for a new ban, such an event may be too risky to insure, she said May 6 by phone.

“The price drivers are the host country, the technology type and the period for which the risk is covered,” Richardson said. Credits from emission-reduction projects in China may be riskier because the EU has said it favors those in least- developed nations, he said. “Beyond 2014, our crystal ball gets foggy,” boosting risks and premium prices, he said.

The risk that a change in legislation by the European Union could render carbon credits, or Certified Emission Reductions, “suddenly worthless is one of the factors holding back the market,” according to a Kiln statement.

“What we’ve done is used fairly conventional insurance products but applied it to a completely new area of industry,” Paul Culham, active underwriter at Kiln, said on the Lloyd’s website. It’s “combining the skills we’ve got on the credit- and-political risk arena with the skills we’ve got in the green- energy type of arena.”

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net

To contact the editor responsible for this story: Stephen Voss at sev@bloomberg.net

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