Commodity Price Fluctuations: Managing the Uncontrollable
Volatile commodity prices can affect the value of a company’s assets and liabilities, but most importantly, this risk can seriously impact operating profit. Historically, the only option to mitigate the pricing risk was through traditional hedging programs, using derivatives. This process is complicated and expensive.
The CommodityCap™ is a new solution to address these risks, helping companies of all sizes to manage commodity price fluctuations through a simple, effective insurance policy.
CommodityCap™ is an insurance product that caps the buy price (or ensures a price floor) for a commodity over a fixed term, by making a claim payment to the insured at the end of coverage period if prices are above the set price.
This indemnity coverage allows companies the opportunity to implement strategies to minimize operating and contractual risk. Any business exposed to volatile prices can benefit from the CommodityCap™ program.
CommodityCap™ provides several key benefits to traditional hedging programs:
- Risk of price fluctuation is removed
- You retain the benefits of positive market movement
- No mark-to-market accounting treatment is required
- No ISDA documents needed
- No credit or collateral management
- No investment policy limitation issues
- Merges easily into existing financial statements
- Eliminates regulatory bottlenecks for all parties
- A company plans to use 1 million gallons of diesel fuel during the period of April 2016 to April 2017.
- The insured can buy a CommodityCap™ coverage with a Cap level of $2.50, meaning it will receive a claim payment if actual prices are above $2.50 during that 12-month period.
- The actual average price per gallon rose from $2.50 to $5.00 during the policy period.
- Because the insured purchased a CommodityCap™ policy, they would receive a claim payment of $2,500,000 ($2.50 per gallon on a covered volume of 1 million gallons) at the end of the policy term.
Industries that stand to find the greatest opportunity include Agriculture, Oil & Gas, Transportation, General & Specialty Contractors.
Cobbs Allen is a national independent agency focused on risk management in niche practice groups. We deliver commercial insurance, employee benefits, personal insurance, and alternative risk financing services to our clients. Headquartered in Birmingham, AL, the firm is ranked in the top 100 of privately held brokerage firms and the top 100 of all U.S. brokerage firms.
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