Commodity Price Risk Insurance

Commodity Price Risk Insurance

Commodity Price Risk Insurance from Matrix is a proprietary insurance product and has been designed to help companies efficiently protect themselves against unforeseen movements in global commodity prices.

Matrix provides commodity price risk management through a user-friendly insurance policy, eliminating the complications traditionally associated with hedging.

Packaging a price management tool as an insurance product offers substantial benefits, including tax advantages on premiums and claims.

The product is a ‘turn-key’ solution that enables the elimination of financial statement risks and creates operating efficiencies, with no credit or collateral management, and no investment policy limitation issues.

A recent example of a commodity price risk structure Matrix created involved an owner with a large stockpile of refined Cobalt who wanted to raise liquidity to purchase more of the metal, but had no collateral beyond the existing Cobalt.

The lender was willing to provide a very large asset-based loan against the value of the Cobalt stockpile, but needed to lay off the risk of Cobalt prices declining to a level where the collateral could be worth less than the loan principal.

Because Cobalt does not trade actively, there was no way to hedge this price risk in the traditional financial markets.

Our specialists created a platform in which major Cobalt consumers would write a put option on prices, effectively getting paid to see if their own supply costs declined sharply.

They then accessed the insurance markets to wrap this derivative position with an insurance policy backed by the insurer’s A+ rating.

Policies are completely flexible in design and offer a range of durations, settlement processes, attachment points/strike prices. Cover can be structured to protect against price increases, include floors to lock in minimum revenues and tailored geographic exposures.

Commodity Price Risk Insurance can be used to:

  • Manage pricing on a range of commodities
  • Protect profitability against price volatility
  • Lock in long-term bid pricing costs
  • Pass on capped prices/future savings to customers
  • Insuring the value of collateral used in debt funding
  • Wrapping insurance-based principal protection coverage around alternative investment vehicles
  • Managing complex commodity price exposures via a simple insurance policy structure

Contact Brad McGill, Managing Director Capital Markets

Brad McGill

T: +44 (0)203 457 0916
M: +44 (1)205 835 2875