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Rising raw material prices: beware of insurance policy limits
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An insurance challenge
Raw materials have experienced sometimes skyrocketing increases in recent years - one thinks in particular of cocoa beans, which saw their price per ton explode in a few months to exceed the symbolic $10,000 mark. This upward and difficult to predict trend generates additional challenges for market players, especially in terms of insurance for transported goods where coverage limits in transit and in stock may become insufficient.
Volatility of raw materials - conjunctural causes
Cocoa is not the only material to have experienced impressive increases in recent years: metals, oil, gas, and all agricultural raw materials have seen their prices rise. The causes are numerous and vary depending on each commodity, but some common denominators can be identified.
Common denominators
Global geopolitical instability: global geopolitical instability, notably the war in Ukraine, the Houthi attacks on the Red Sea and the Israeli-Palestinian conflict, have caused turmoil on the markets, leading to increases in oil and gas prices and changes in shipping routes, which in turn influence production and transport costs.
Consequences of the health crisis: although this period seems to be over, the consequences of the health crisis are still having an impact on the market. The resumption of global economic flows has been hampered by the limited supply of certain raw materials due to logistical bottlenecks and supply difficulties on a global scale, the effects of which are still being felt today.
Climatic conditions: we can focus here once again on cocoa, where price volatility has been largely caused by climatic phenomena. In addition to El Nino, which is causing meteorological changes on a global scale, Côte d'Ivoire and Ghana (which account for 60% of the world's cocoa production) have been hit by persistent drought, leading to a significant reduction in production in these countries and a consequent rise in prices.
Insurance risks related
The absence of automatic contract indexing: les polices et contrats d’assurances ne sont en général pas indexés aux prix des marchandises. En effet, An insurance limit per transport, per storage location, and/or per event is often set during the negotiation of contractual conditions (at the time of subscription or at renewal) and remains valid for the year. This limit is not adjustable, there is no automatic revision, and it can suddenly become disconnected from the real value of the goods being transported or stored, thus putting the Insured at direct risk for the portion exceeding these limits.
An insurance limit per transport, per storage location, and/or per event is often set during the negotiation of contractual conditions (at the time of subscription or at renewal) and remains valid for the year. This limit is not adjustable, there is no automatic revision, and it can suddenly become disconnected from the real value of the goods being transported or stored, thus putting the Insured at direct risk for the portion exceeding these limits.
The risks related to underinsurance: if the Insured does not declare the new values of the goods being transported or stored, they may find themselves in a situation of underinsurance: which can be synonymous with sanctions when the proportional rule is not repealed within the contracts. Indeed, if the insured value is lower than the actual value of the goods, the indemnity is adjusted and the insurer will only compensate the claim in proportion to the coverage subscribed compared to the value of the goods.
An insurance limit per transport, per storage location, and/or per event is often set during the negotiation of contractual conditions (at the time of subscription or at renewal) and remains valid for the year. This limit is not adjustable, there is no automatic revision, and it can suddenly become disconnected from the real value of the goods being transported or stored, thus putting the Insured at direct risk for the portion exceeding these limits.
Solutions to limit these risks
Regular surveillance and risk management: there is no miracle solution, today it is essential for companies to regularly review their insurance contracts to ensure that they are in line with the reality of their exposures. Thus, policyholders with the help of their insurance brokers must carry out regular audits (especially in a context like the one we are currently facing) without waiting for the renewal of the contract to assess these limits. The specialist broker is there to proactively assist the policyholder on a daily basis in this audit work.
The purchase of additional capacity: once the inventory has been carried out and if it turns out that the insurance limit of the contract is not sufficient, several options are available to the Insureds upon payment of additional premiums.
