Philippine de Villèle, Director, BPL Global
As for many other commodities, the coffee you drink every morning may well have been insured against credit and political risk at some stage. Not that many people would know that, as whilst this type of insurance is a niche market, it plays an important role in the trading and financing of commodities.
Coffee merchants face various risks when sourcing beans in producing countries. Risks include the performance of the producer, a political risk in the producer’s country that could prevent the merchant from accessing the goods or being unable to export them, and also non-delivery of the goods while a prepayment has been made. In addition, merchants also face credit risk arising from the sale of coffee to end buyers, either via open account sales or where the end buyer opens a Letter of Credit with a local bank.
Both performance and credit risk can be mitigated by a comprehensive insurance contract underwritten by Credit and Political Risk insurers. Such insurance cover is key for merchants to manage their own risks and also provides an additional comfort (sometimes a must-have) for the banks that finance the underlying transactions. The credit and political risk insurance market can also help merchants and traders manage the payment of their margin calls and the potential loss under a hedge agreement if there is no physical delivery of the goods when due.
Banks are also big buyers of credit and political risk insurance (not only for their commodity finance desks but an ever-increasing number of other asset classes) as it enables them to optimise their balance sheet, resulting in higher credit lines being extended to traders.
The relationship between the commodity trading and financing industries and the credit and political risk insurance market started in the early 80s. Commodities have historically been the single sector where BPL receives most of its inquiries from clients. In 2023, this sector represented 44% of the total 2491 inquiries received and nearly 20% of the policies placed by BPL. Using our data as a proxy for the wider market, BPL estimates that in 2023, credit and political risk insurance policies covered north of USD76 bn of commodities related transactions.
Insurers see commodity business as a good fit for their appetite because they have a deep understanding of the underlying markets, the premiums on offer are often highly attractive compared to other more general classes of insurance; and perhaps most important point is insurers’ proven positive experience of workout situations leading to high levels of recovery. It is not just your coffee that may have been protected by credit and political risk insurance as it also plays a discrete role with the other commodities featuring in this magazine: the gas in your car, the bread on your plate and the copper in your phone. This part of the insurance market may be unfamiliar to some, but it plays a disproportionately critical role in greasing the wheels of international trade.