ChAI Protect Insurance FAQ

ChAI Protect Commodity Price Risk Insurance Frequently Asked Questions

ChAI Protect Basics

What is ChAI Protect?

ChAI Protect is an insurance product designed to help a manufacturer defend 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 and packaging 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, 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.

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, you’re eligible for a payout to compensate you for your losses, stabilising your spend or income.

Why do I need ChAI insurance?

ChAI Protects businesses exposed to raw material price risk over a broad range of different commodities, including those not reported on exchanges, meaning areas of spend you didn’t think you could control can be easily managed with ChAI.

If you’re currently purchasing ad hoc or managing price risk with long term supplier contracts, ChAI Protect gives you greater price certainty over longer time periods for a lower cost, all whilst reducing your credit and counterparty risk.

Where you’re already using exchange-traded risk management tools, ChAI helps you eliminate basis risk by selecting exactly the relevant Price Reporting Agency index to match your specific exposure, such as a particular alloy of metal, or grade of agricultural product.

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 2024.

How is ChAI regulated?

ChAI is the trading name of Commodities AI Ltd

Company Registration Number: 11812159

REGISTERED OFFICE ADDRESS: 128 City Road, London, EC1V 2NX.

Commodities AI Limited (FRN: 1007708) is an appointed representative of Gateway Platform Services Ltd for Insurance Distribution activities. Gateway Platform Services Ltd is authorised and regulated by the Financial Conduct Authority (FRN:.790558). You can check this by visiting the Financial Services Register at www.fca.org.uk/register.

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.

What commodities does ChAI Protect currently cover?

We currently offer coverage against a range of indices in Plastics, Metals, Agriculturals and Forest Goods. Price reporting agencies we partner with include S&P Global Commodity Insights and Fastmarkets. Please ask about specific contracts that are of interest to you.

Why is ChAI Protect a good alternative to futures, options and derivatives?

ChAI has four core benefits over futures, options and derivatives:

1 - ChAI Protect can be used to cover exposure to commodities not traded on exchange, such as plastics, or specific grades of steel

2 - ChAI Protect is easy to access, without the regulatory registration requirements of exchange traded derivatives

3 - ChAI Protect doesn't lock up your capital; no need for collateral or risk of margin calls

4 - ChAI Protect’s accounting is more straightforward, not requiring complex hedge accounting or extensive mark to market accounting.

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 Coverage is Structured

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:

  1. Basic Price
  2. Start Price
  3. 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, ChAI as the designated Claims Handler will let your insurer know of one or more named perils that have 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 60 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. Full details are available in policy documentation.

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.

How ChAI Protect Makes Payouts

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.

All you’ll need to do is 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 at the end of each covered calendar month in which a payout is due, and at the end of the policy. This ‘Proof of Loss’ 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), and the funds will be released.

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?

The process is simple, 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.

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.

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 (see, What is the role of a ‘Peril’?). 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, and a named peril is identified to relate this to a real-world event  (see, What is the role of a ‘Peril’?).

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 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.

Documentation & Cancellation

What documentation do we receive?

Your coverage is defined in your Policy document, which you’ll receive a signed copy of on inception of the Policy.

You will also be able to access and download all the documents relating to your policy, including the Certificate, Policy Schedule and Policy Terms on the ChAI Platform in the Manage Quotes and Policies Table

Can I cancel my ChAI policy?

Once the premium is paid, you can not cancel your policy, except in the case that the Original Supply Agreement that was supplied to evidence your business’ need for insurance is itself cancelled, in which case your policy is terminated automatically. This is to ensure that the Policy is not used for speculation.

ChAI’s Business

About ChAI

ChAI believes raw materials are some of the most valuable assets for humanity.

The complex value chain that goes from extraction and production to the use of commodities can be affected by thousands of factors.

We work hard to help understand these key factors, and by consequence raw material prices, to make the organisations we work with more resilient and the world a better place.

How does ChAI make money?

Depending on your geography, ChAI has deployed different legal frameworks to support the execution of your Policy.

Typically, ChAI operates as an MGA (Managing General Agent). ChAI is hired by an insurance company to provide technical underwriting services and these will include distributing and pricing the risk, and managing any claims. ChAI will receive a fee from the insurance company for these services. There are no other charges to use ChAI and there are no other fees involved.

How does ChAI price the premiums?

ChAI Protect’s premiums are determined based on a range of factors using our commodity and financial markets expertise. The key drivers of our pricing models include the characteristics and risk of the commodity you’re looking to protect, the breadth and timelines of cover.