Cargo Insurance & Risk Management: Commodities Downturn

25 July 2016

There has been a marked downturn in commodity pricing in recent years as a slowdown in China has converged with an over-supply of oil to send values plummeting.

The slump in prices has inevitably produced a number of challenging issues for companies within the sector as falling profits can impact on many areas, including the risk transfer process. 

The Bloomberg Commodity Index (BCOM), a diversified commodity price index that tracks the price of futures contracts on 22 physical commodities, has dropped markedly from 162 at the start of 2011, to stand at just 78 at the end of last year. In the last 18 months alone the price of Brent crude has dropped 15% while LME base metal prices have dropped 15-20% over the same period. 

Key drivers of these falls have included OPEC, led by Saudi Arabia, embarking on a strategy of protecting its market share by pumping yet more crude oil despite falling prices. At the same time the Chinese economy continues to be in serious slowdown, which has a significant effect on global commodity prices simply by reason of its prolific consumption of raw materials. This fall in value of traded commodities has a significant direct impact on declared insured values for cargo insurance purposes, which in the majority of cases will be fundamentally linked to a market price. 

Insurance market

Despite these falling insured values the cargo insurance market remains soft, due in most part to a general market over capacity and a fairly benign recent catastrophe loss history. As a consequence insurance rates have been maintained, or even reduced, with the commodity portfolio premium base consequently continuing to fall. With falling profit margins as a result of falling prices, there has to be an even greater focus of commodity clients generally in ensuring that they are still obtaining the best possible product at the best possible pricing. “As a longstanding specialist commodity insurance broker this is where JLT Specialty can continue to differentiate itself. Through our collective expertise, both on the placing and claims side, we are able to ensure that our clients or prospective clients can rely on the fact that we are talking to insurance providers who know their business and are willing to partner with them to provide comprehensive cover at competitive pricing through the good times and the bad,” says James Divine, Cargo Deputy Chairman at JLT Specialty. Whilst insured values are down this does not necessarily mean that paid claims are down proportionally. As Divine explains “Experience has shown us that a depressed commodity market and sluggish general economy can actually lead to an increased frequency of loss within certain areas of the supply chain as a consequence of cost cutting, falling investment and increased moral hazard.” 

Market pricing 

However these factors alone are not enough to influence any general market price change at this time, and the London cargo insurance market remains extremely strong, active and competitive in commodity business. It remains important however for JLT Specialty to assist its clients in differentiating themselves from any possible worsening market perceptions of risk and return in the sector. 

Divine says: “We see it as our mission to ensure that the work being undertaken by our commodity clients, in terms of active loss prevention and control and the employment of other risk management, compliance and audit techniques to address matters of concern in these challenging conditions are fully conveyed to insurers and are duly rewarded. The business should be aligned with those insurers who we know are committed to partnership in this area to achieve the most effective product and pricing structures.” Although there have been recent signs of stability in the commodities market, the Bloomberg Commodity Index (BCOM) had recovered to 90 by the start of June, there are few signs of an extended recovery. 

“For the immediate future we would expect to see various smaller individual commodity price swings, up and own, based on usual pricing factors, in particular where in response to the latest key economic numbers from the US and China, with a consequent mirroring in insured cargo values for both transit and stock risks. 

In terms of insurance costings we see the soft cargo market conditions prevailing for the foreseeable future, so general cargo pricing should continue to be extremely competitive and even more so where we can use our experience to assist our clients in demonstrating attractive risk profile differentiations,” concludes Divine. 

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For further information, please contact James Divine, Deputy Cargo Chairman on +44 20 7466 6554 or email james_divine@jltgroup.com

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