InsTech's Henry Gale speaks to Tristan Fletcher, Co-founder and CEO of ChAI, to discuss commodity price risk, parametric insurance and ChAI’s collaboration with Insurtech Gateway.
Henry: What does ChAI currently offer to its clients?
Tristan: ChAI provides a market intelligence tool for commodity prices. It forecasts commodity prices up to a year ahead as a distribution of outcomes. It also explains what factors are driving the predicted price changes. These forecasts are updated daily.
Henry: Who are ChAI’s customers?
Tristan: ChAI’s initial focus is fast-moving consumer goods and food production companies, such as Mondelez International. Other current clients include automotive manufacturers, pharmaceutical companies, petrochemical organisations and airlines. ChAI operates across several sectors that experience raw material price inflation and volatility.
Henry: Why is ChAI entering insurance?
Tristan: ChAI’s co-founders always set out to create a parametric insurance product that would protect our clients from drastic changes in commodity prices. The market intelligence tool has the technical capabilities to price insurance premiums and simulate underwriting portfolios. Some existing ChAI customers have signed letters of intent saying they will buy insurance from us when we create the insurance product.
Henry: What led you to found ChAI?
Tristan: I had previously worked as a management consultant, serving fast-moving consumer goods and food production companies. Then I subsequently worked in financial services trading and pricing commodities and as an academic researching AI techniques for forecasting them.
I realised there was an opportunity to take the datasets and expertise being used for commodity price speculation and apply them to managing commodity price risk in physical supply chains.
Henry: What datasets can be used to forecast commodity prices?
Tristan: Satellite imagery is one example: photos of opencast mines, fields of wheat, cocoa and sugar farms. ChAI also tracks every vessel movement globally and its contents. Other, more standard datasets include currency movements and inventories (the amount of commodities that are sitting in warehouses).
Henry: How does ChAI interpret these datasets?
Tristan: ChAI trains machine learning models to associate variations in data, such as changes in satellite imagery or the movement of boats, with future price movement.
As a result, ChAI can turn satellite, maritime and other data into pricing insights. For example, if many cars are shipped into Shanghai, ChAI can provide insights into what that signals about the future aluminium price.
Henry: Why is insurance for commodity price risks needed?
Tristan: ChAI is building commodity price risk insurance products for two reasons. Firstly, to allow smaller companies that are underserved by existing risk transfer solutions, such as options or futures markets, to transfer commodity price risks. Derivatives are much less accessible to smaller companies.
Secondly, even the largest companies, including ChAI’s current clients, find it hard to transfer risk for many raw materials, such as plastics and steel. ChAI’s insurance products are designed to help them transfer those risks.
Henry: How would the parametric insurance product work in practice?
Tristan: The parametric insurance product is based on a price index. For example, if the price of a commodity rises above X, a claim is triggered automatically. The policyholder is paid the difference between the closing price and X: either on a single date or over a range of dates. ChAI also hopes to sell to suppliers, who would insure against falls in the price of commodities.
Henry: Tell us about ChAI’s collaboration with Insurtech Gateway.
Tristan: ChAI is pleased to be working with Insurtech Gateway and has been speaking to them for several years. Insurtech Gateway has launched lots of companies similar to ChAI. Insurtech Gateway is helping with the insurance product’s financial structure and regulatory aspects. For example it is helping us decide where to domicile the MGA and how we should structure the portfolio of risks. Insurtech Gateway’s connections are also helping us source capacity and distribution.
Henry: One theme in parametric insurance is that it can be hard to educate customers about new products. Is that an issue in conversations with clients?
Tristan: ChAI’s parametric insurance products are generally easy to explain to clients, partly because they are similar to derivatives and partly because there are existing companies like Stable offering similar products already for different commodities.
Henry: War in Ukraine and the European energy crisis are putting commodity prices in the public spotlight. Do you think these events will affect demand for commodity price risk insurance?
Tristan: Commodity price risk insurance is becoming a more compelling sell when the world is experiencing a period of inflation and volatility. Companies can understand how much money they would have saved in recent years if they had been able to insure against changes in commodity prices.
Henry: ChAI is an MGA. What is your message to insurers who might consider providing capacity?
Tristan: We believe ChAI’s ability to forecast distributions of commodity price scenarios allows us to create a product with competitive premiums and good loss ratios. ChAI has run simulations to illustrate our premiums and loss ratios. Because most clients would insure against commodity prices increasing, the underwriting portfolio would perform well when financial markets are rising, and hence useful for insurers from a risk perspective.
Henry: Where are the biggest areas of opportunity for ChAI in insurance?
Tristan: ChAI is starting with its current clients, which are big corporates. Fast-moving consumer goods companies find it easier to transfer price risks for what is inside packaging, but not the packaging materials themselves. The initial focus is on developing insurance products for these risks, which include plastics and ferrous metals.
In the longer term, ChAI intends to make commodity price risk insurance accessible to smaller companies for a broader range of commodities. This has a very large total addressable market.
Henry: Why has ChAI joined InsTech as a corporate member?
Tristan: ChAI has joined InsTech to build brand awareness in the insurance community, develop further relationships in the parametric insurance space and keep in the loop on the latest trends in insurance innovation. InsTech Executive Chairman Robin Merttens helped us at an early stage with insurance connections and advice and we want to be part of the community.
Henry: What companies and people would ChAI like to connect with?
Tristan: ChAI would like to connect with other interesting MGAs and parametric insurance companies. We also want to speak to insurance capacity providers and potential distribution partners. ChAI is currently hiring for a number of insurance-related roles too.
To find out more about ChAI, please reach out to Tristan Fletcher (firstname.lastname@example.org).