ChAI Protect Buyers Guide - FAQ

Raw Material Price Insurance Buyers Guide

ChAI Protect - Introduction

What is ChAI Protect?

ChAI Protect is an insurance product designed to help a manufacturer protect against costs associated with the volatility of raw materials prices in their supplier contracts, in turn passing on pricing benefits to the end consumer.

It uses benchmark prices for raw materials like agriculturals, metals, plastics, forest & recycling products as a reference, allowing insurance policies to be written that protect against unexpected losses from changes in prices, as they manifest in the goods that manufacturing companies buy and sell.

How does ChAI work?

To take out coverage with ChAI, you select the goods or raw materials you’d like to protect against price changes, and an index that reflects the price volatility risk you experience when buying those goods. For example, if you’re purchasing PET bottles in Europe, we’ll help you identify a European PET plastic price with one of our Price Reporting Agency partners (e.g S&P Global Commodity Insights & Fastmarkets), and use this as the basis for assessing your cover.

You then let us know the volume you’d like to protect, the time periods in which you’d like your purchases to be covered, how often you’d like to receive payouts. Finally select your coverage range, according to how significant a price movement you’re looking to protect against. Once all policy parameters have been agreed, we’ll issue you a quote that you can sign to buy your cover. Premiums are payable before the specified date on the policy, typically the longer time period of the end of the ongoing month, or 2 weeks.

After each covered month in your policy, we’ll check whether the index price has moved into or past your coverage range, and when it has, if you’ve made a loss, you’re eligible for a payout to compensate you for your losses, stabilising your spend or income.

Where is ChAI available?

ChAI is currently available directly from ChAI in the UK, and through brokers in the EU and US, with plans already underway to roll it out to other countries and industries across the world in 2025.

Who can use ChAI?

Any trading business (generally, but not always, manufacturers) that carries a risk of loss of income due to commodity price volatility can use ChAI to mitigate that risk.

Insurers call this risk to loss of income insurable interest and it’s a vital part of how ChAI operates. ChAI is not available for financial speculation of any kind, and businesses cannot protect more than they buy or sell.

Can I speculate using ChAI?

No. We work tirelessly to block speculation; ChAI Protect is a tool to manage real risk to your real business, rather than trying to make a financial trade for profit (speculation). Businesses are limited to taking out coverage against goods that they actually buy or sell.

How to apply this insurance product across a portfolio of costs?

While we cannot specifically advise you on how to manage your full portfolio of commodity price exposures, a good starting point is to rank your exposures from critical (high risk, and high impact from unfavourable market movements) to do nothing (low risk, and low impact from unfavourable market movements). Following this, a well-managed portfolio of commodity price risk would take your critical exposures and use a mix of solutions to optimise for your business priorities.

To learn more about how we would think about your raw material exposures, you can request for a Risk Report here. This would take publicly available information about your organisation to build a profile of your commodity exposures, and generate a suggested mix of risk management options to manage that exposure.

Which markets does ChAI Protect work best in? Where is ChAI Protect not the likely first choice risk management/hedging solution?

ChAI Protect is designed for businesses that are materially exposed to volatile raw-material or commodity prices and want greater certainty around budgets, margins, and procurement costs. It is particularly useful where traditional hedging tools are unavailable, impractical, operationally burdensome, or do not closely match the underlying exposure (high basis risk). Many companies use ChAI Protect where they want protection against adverse market price movements without the complexity of exchange-traded hedging programmes, margin calls, or derivative infrastructure.

The product works best when a company’s procurement exposure broadly tracks an independent market benchmark over time. In these situations, ChAI Protect can help reduce the financial impact of unexpected price increases and improve planning confidence during volatile market conditions.

However, ChAI Protect may be less suitable where purchase prices are driven primarily by supplier-specific arrangements (e.g. if your purchase price is locked in via a fixed price contract) or pricing dynamics that do not reasonably align with benchmark indices. It may also be less relevant for businesses with immaterial commodity exposure or organisations that already operate sophisticated commodity hedging programmes internally.

It is not a tool designed to replace your existing commodity hedging strategy, but one that is designed to supplement your current strategy by offering an additional tool that can enhance what you already do and covers what existing options don’t. It’s a way to remove the risks that are hardest to manage and explain.

ChAI Protect Client Information Requirement Checklist

This document outlines the list of information and materials we require in order to be able to transact a policy with a client.

Mandatory:

Benchmark Index: ChAI Protect policies are always linked to an independent benchmark index. This needs to be agreed between ChAI and the client in order to provide an indicative pricing/quote etc. A benchmark index can be any index published by a 3rd party provider such as:
1. Fastmarkets, S&P Global Commodity Insights (Platts), or similar Price Reporting Agencies
  1. If ChAI do not have a pre-existing relationship with your PRA of choice, we will aim to onboard the PRA as a provider on our end, or identify a suitable proxy contract if required.
2. USDA, European Commission or similar governmental agencies that publish benchmark price indices in various agricultural or other niche markets
3. LME, CME, or other similar exchanges that publish commodity indices - ChAI consider exchange traded contracts as a relevant benchmark index on a case by case basis
4. Other misc 3rd party organisations that publish a price series for niche raw materials
Proof of Insurable Interest: As an insurance contract, ChAI need to be able to demonstrate that the client has an insurable interest, i.e. that the client has a financial risk associated with the item being insured (the covered raw material). This can be demonstrated through:
1. A supplier contract that requires a client to purchase a raw material at a future date
2. Proof of recurring/held inventory of a raw material for the purposes of future sales
3. Purchase orders or invoices demonstrating consistent purchase/sale of the covered raw material
4. Financial statements showing consistent pattern of buying/selling the covered raw material
Insured Volume (for Proof of Loss): To be able to effectively value the policy at the time a claim is made, the insured needs to demonstrate that they have transacted on a volume of the raw material up to the claimed volume of the raw material. So there is no ambiguity about the claims, we require that a sample proof of loss be agreed up front. This can be demonstrated through:
1. Purchase orders, sales invoice, or delivery note showing purchase/delivery of a volume of the raw material to the counter-party
2. Internal auditing of stocks demonstrating that the inventory of a raw material went up/down by the claimed volume during the covered period
3. Statement from supplier declaring total volume of raw material delivered to the insured
4. Statement from the buyer declaring total volume of raw material delivered by the insured

ChAI Protect Structure

How does the index price impact my payouts?

There are 3 price levels of your chosen reference index that are used to determine a payout, described below:

Basic Price
Start Price
Limit Price

The Basic Price is set to the index level at the inception of the policy. It serves as a baseline that determines what ‘no change’ looks like over the life of the policy.

For a buy-side policy, your Start Price must be higher than your Basic Price, with the difference being the portion of price risk that you retain. This means that small increases in the index price don’t result in a payout, but larger ones do, ensuring the interests of you and your insurer are aligned. Payouts increase as the index price rises from the Start Price up to the Limit Price, then reach a cap.

For a sell-side policy, your Start Price must be lower than your Basic Price, with the difference being the portion of price risk that you retain. This means that small decreases in the index price don’t result in a payout, but larger ones do, ensuring the interests of you and your insurer are aligned. Payouts increase as the index price falls from the Start Price up to the Limit Price, then reach a cap.

In your Policy, you’ll see the Start Price and Limit Price expressed in terms of cash amounts (called the Deductible and Limit of Liability respectively) rather than index prices per unit, as they take into account the volume of purchases made as well as the index level. The index levels these are equivalent to can be inferred from these cash values.

What is a Start Price?

The Start Price is the floor price our clients select for the policy. The closer the Start Price is to the current index price (Basic Price) the more expensive your quote will be. That’s because it’s far more likely to result in a payout. The further the Start Price is away from the Basic Price, the lower your quote will be.

This is just like selecting the level of excess in your car insurance. The greater the excess, the cheaper the quote.

What is the Limit Price?

Your payouts increase the greater the change in index price between the Start Price and the Limit Price. The Limit Price is in place to make your premiums more affordable, as it controls the largest amount that could be paid out under the policy. It’s just like selecting your maximum cover level when you buy travel health insurance.

What’s the role of a ‘Peril’?

Just as you must have a physical exposure to the goods you’re insuring (known as ‘insurable interest’ in the industry), insurance policies must relate the policy’s payout back to a real-world event or effect that could plausibly have caused the price to move against you.

ChAI Protect does this through identifying a ‘peril’, and your policy documentation contains more detail on what this includes. In essence, anything that might create a supply/ demand imbalance of a material - from the weather, or simply a change to the political or economic backdrop - could be identified as having influenced the price, and be a valid peril.

When your policy triggers and you submit a Claim Notice, ChAI as the designated Claims Handler will let your insurer know of a peril that has played a role in the price of your raw materials on your behalf - there’s nothing you need to do.

When can insurance cover begin and end?

Coverage can start as soon as 90 days from policy inception, and extend up to 12 months into the future. Payouts are generally determined on a monthly basis, however single-date policies and other periodicities of settlement are possible in order to mirror your specific supplier contract risk - contact us for more information.

Why can’t I insure against next month's index price?

ChAI Protect is an insurance product, not a tool for speculation or trading. To ensure asymmetries in market information are not distorting the price of raw materials covered and protect the product from being misused for speculation, we don’t allow for short-dated policies.

How often does ChAI Protect pay out?

Payouts and the valuation of those payouts can be structured to mirror the risks in your supplier contract pricing. Typically, your losses are valued on a calendar month basis using the average index price for that period, or for a recent historical price that matches how your supplier contract references the Index. Cash payouts are made within 45 days of losses being confirmed. Full details are available in policy documentation.

How much can I protect?

ChAI has democratised price risk management; we seek to help you protect as little as 10 tonnes or 10,000 tonnes. We’re able to support policies of up to £10m worth of raw material exposure.

To make sure ChAI is used by clients with real risk, we limit the maximum amount of protection you can purchase to the volume of raw materials you can evidence you’ll be buying or selling over the coming year, such as through one or more supplier policys, or evidence of the volumes you’ve transacted in previous years. This is important as this isn’t a speculation or trading tool so we take this element very seriously. We use 3rd party benchmarks, public/government databases and data validation tools to make sure the amount being purchased is reasonable for a business of your size.

Why does ChAI only offer up to 12 months protection?

The longer the policy, the more expensive the protection, as the likelihood that a policy will payout increases over time. To keep our premiums affordable, we limit cover to 12 months from policy inception.

Who actually takes the risk on board, who is our counterparty?

ChAI Protect is fully backed by A-rated reinsurers who are ultimately responsible for the risk and any payouts, regardless of the transacting counter-party. The transacting counter-party will depend on which jurisdiction your buying entity is based out of, for regulatory reasons. If you would like to understand how this works in more detail, please contact us.

What is the accounting treatment of ChAI Protect policies?

ChAI have external accounting advice we can share on request.

ChAI is not authorised or regulated to provide accounting, audit, tax or legal advice. The information provided is for general informational purposes only and does not constitute professional advice. Accounting treatment will depend on a customer’s individual facts and circumstances, and customers should seek advice from their own professional advisers before determining any accounting treatment

The advice is that the policy is legally structured as insurance, but economically it may behave similar to a commodity price hedge because payouts are linked primarily to commodity price indices. As a result, the external advice notes concluded the contract could fall within derivative accounting under IFRS/UK GAAP and therefore may potentially be accounted for using fair value (mark-to-market) accounting.
IAS 8 / FRS 102 allows judgement where standards are unclear, meaning management must choose an accounting policy that gives a “true and fair view.” This provides some flexibility if management believes insurance-style accounting better reflects the commercial substance of the arrangement.

How do ChAI Protect payouts work?

How do I receive a payout?

Unlike most insurance products, there’s very little you need to do to receive a payout. You’ll know immediately when you’re due a payout with a notification straight to your inbox, as the calculations are done by ChAI automatically using your chosen index.

You’ll need to confirm that you have actually bought or sold the expected volume of raw materials covered by the policy.

You do this by returning a simple form which is at the end of your policy called a ‘claim notice’ at the end of each covered calendar month in which a payout is due, and at the end of the policy. Along with ‘Proof of Loss’ (such as an invoice/receipt) this is part of our ‘insurable interest’ checks that make ChAI Protect possible.

Your payout is determined by the Index price change and the volume you’ve transacted.

How do I get paid for a claim?

When an active month within your policy ends, you’ll get notified regarding your eligibility for a claim. You simply need to respond with the volume of covered goods you’ve transacted that month via a simple form (part of our ‘insurable interest’ checks) along with your proof of loss, and the funds will be released to you.

In case of any misstatements in monthly volumes, there’s also an opportunity at the end of the policy to receive or make a final payment, depending on whether there’s been an over or understatement of transacted volume. This is known as policy reconciliation.

How do you decide whether I am due a payout?

This is based on the independant index price, and the coverage range you’ve chosen.

When selecting your insurance coverage, you will be asked to choose what price rise (or price fall) you want protection from.

For a buy-side policy, you select a Start Price that dictates where your coverage begins that is higher than the most recent (Basic) price, with the difference being the portion of price risk that you retain. This means that small increases in the index price don’t result in a payout, but larger ones do, ensuring the interests of you and your insurer are aligned. Payouts increase as the index price rises from the Start Price up to the Limit Price, then reach a cap.

For a sell-side policy, you select a Start Price that dictates where your coverage begins that is lower than the most recent (Basic) price, with the difference being the portion of price risk that you retain. This means that small decreases in the index price don’t result in a payout, but larger ones do, ensuring the interests of you and your insurer are aligned. Payouts increase as the index price falls from the Start Price up to the Limit Price, then reach a cap.

The decision to pay out is calculated based entirely on the movement of the index, and the accompanying ‘peril’ that is identified as contributing to the price change. Unlike a traditional insurance approach, there’s no scope for a Loss Adjuster (who may be incentivised to do everything they can to reduce the amount they pay you) to influence the amount you’re owed. We don’t have that conflict and that’s why we built ChAI Protect in this way.

Are ChAI payouts guaranteed?

Full terms are included in your policy, however in summary, payouts are made whenever the index price for a covered month in your policy exceeds the lower threshold for cover agreed when creating your Policy, a loss has occurred and a named peril is identified to relate this to a real-world event.

Your policy is underwritten by some of the world's largest insurers. When you buy a policy through ChAI, the Underwriters are listed on your certificate of insurance.

Does this insurance policy require a Proof of Loss? What counts as Proof of Loss? Will the process delay the payment?

Yes, we require you to provide a Proof of Loss when making a claim against the policy. ChAI Protect is designed to protect you against any losses arising from your sale/purchase of raw materials when the markets have moved unfavourably for you. A proof of loss is required to determine that you have in fact transacted on the covered raw materials at a time where the policy is in place and you are protected, and to confirm the volume of raw materials that you are claiming a payout for.

We accept any official evidence that demonstrates that a transaction for the covered raw materials has taken place and what volume was transacted on. This can be, but is not limited to:

Purchase orders, sales invoice, or delivery note showing purchase/delivery of a volume of the raw material to the counter-party
Internal auditing of stocks demonstrating that the inventory of a raw material went up/down by the claimed volume during the covered period
Statement from supplier declaring total volume of raw material delivered to the insured
Statement from the buyer declaring total volume of raw material delivered by the insured

To remove any administrative friction at the time of a payout being made, we aim to pre-agree on the exact materials that will be used as Proof of Loss (with the insured sending over examples), and ensure that ChAI know how to derive the necessary information from the materials. The typical timeline is for all valid claims to be paid out within 60 days of a triggering event (price trigger is hit) provided supporting evidence is provided by the insured on time.

Does ChAI protect the price my business pays?

No, not unless the index used to price and value your policy becomes unavailable, in which case we may use actual prices paid by your business as a back-up to determine your payouts, following a process set out in the policy. We do not protect the portion of costs your business pays or receives for goods protected by the policy that aren’t related to changes in the raw material price, such as changes to quality, specification, or profits.

Are clients who make claims penalised by higher premium prices?

No. Our clients are not penalised because a claim has been awarded in the past. Our pricing uses financial market modelling techniques and commodity market expertise to determine pricing, rather than techniques like ‘no claims’ used in other types of commercial and consumer insurance. We are determined to help commodity businesses plan their futures with more confidence so they can become more financially secure. Penalising clients by then asking them to pay higher prices for their future insurance premiums would be counterproductive as far as we are concerned.

What happens if the index price is delayed?

Your policy sets out the process for determining the relevant index price used to calculate a payout, including how long we’ll wait for publication of data before we use one of the fall back valuation methodologies. This is customised to reflect the pricing periodicity and lag that appears in your supply agreements, and the frequency of benchmark publication.

What is the downside if this insurance policy doesn’t have any claims?

ChAI Protect policies are designed to ensure that you don’t need to worry about the risk of unfavourable price movements. As opposed to options markets, ChAI Protect policies only limit the downside risk of unfavourable price movements while allowing you full participation in any favourable price changes. If the price moves favourably for you, you get to take the full benefit of this, and if the price moves unfavourably, your downside risk is capped.

Protect Your Prices from Volatility

ChAI Protect is a cutting-edge insurance solution designed to shield your business from unexpected raw material price swings. Secure your margins with tailored protection across a wide range of raw materials.