Covering energy price risk with parametric insurance

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Insight
Henry Gale

The Paratus Group of Companies, founded in May 2020, offers parametric insurance for marine fuels, freight, LNG (liquefied natural gas) and carbon emissions price risks. If the physical price exceeds a trigger level determined in the policy, once validated, a cash settlement is paid out automatically. We spoke to Gus Majed, Founder and Group CEO of Paratus, to find out more about the business.

Background

The cargo industry is highly exposed to changes in the prices of fuel and freight, which fluctuate due to a complex range of variables. This presents a challenge to balance sheets where fuel and freight are the largest operating costs.

Large companies such as airlines commonly protect themselves against changing prices by hedging derivatives. Derivatives, financial instruments that move in value as an underlying asset such as oil, can be bought and sold to offset the risk from price fluctuations.

But derivative hedging is not well suited to small and medium-sized companies, particularly in the maritime sector. Trading financial instruments is too complex to be a realistic method of managing their risk, and many are unable to hedge because they are registered offshore.

Hedging can also make it harder for companies to be flexible to changes in demand. When the price of oil collapsed last year due to the Covid-19 pandemic, the hedges taken out by airlines forced them to buy volumes of fuel they would no longer consume at prices above market value.

Business proposition

Paratus’ parametric insurance policies are an alternative way for companies to manage price risk.

Founder and Group CEO Gus Majed's background is as a proprietary oil trader, with experience in physical, derivatives and hedge funds at Vitol. Gus started Paratus in 2019 after coming across the US Department of Agriculture’s Price Loss Coverage programme, which provides subsidies to farmers when the price of crops falls. He concluded that a parametric insurance policy could be used to manage energy price risk in a similar way.

Paratus’ first product covers fuel price risk for shipping companies. A company pays a regular premium, and if fuel prices rise higher than the trigger determined in the policy, Paratus pays out the difference. Whilst derivatives would be treated as liabilities on the balance sheet, taking out this parametric insurance policy turns fuel price risk into a fixed cost.

Activity and partnerships

Paratus is an insurer licensed by the Guernsey Financial Services Commission and transfers risk to specific underwriters at Lloyd’s (Paratus won’t disclose which companies specifically are providing the capacity). It has partnered with specialty insurance broker Price Forbes and international shipbroker Gibson Shipbrokers to distribute its policies.

In April, Paratus announced that it had bound its first fuel price insurance policies for shipping companies. It has obtained regulatory approval to provide freight price policies and expects to bind policies soon. Paratus is also planning to offer products for the aviation industry in the future.

Context

Parametric insurance, traditionally associated with natural catastrophes, is now being used to cover more types of risk where indemnity-based insurance is not available or falls short of industry needs. We released a comprehensive report into parametric insurance last October, free to InsTech London members, and you can keep up to date with new developments by signing up to the Parametric Post, our free monthly newsletter dedicated to parametric insurance.

The policies Paratus is binding proves that parametric insurance offers opportunities for insurers looking to write business in new areas. We’ll follow Gus and his team closely as they start to take on more clients and cover more types of risk.

 

For more information about Paratus Group, go to paratusltd.com.