Sourcing raw materials like cocoa has become challenging for FMCG, with a complex mix of economic, geographical and environmental factors creating a perfect storm.
That challenge is particularly acute for small and medium enterprises, who don’t have the might, scale or resources to absorb sudden price variations.
That’s why ChAI has created a new insurance product, drawing on the power of AI, to effectively ‘democratize’ access to raw materials for all companies.
High prices, high risk
Cocoa, coffee and other commodities have reached soaring highs in recent months and years.
Conflict and geopolitical uncertainty are affecting raw material markets. Supply chains are adjusting to instability, trade wars, tariffs and sanctions. And climate change is creating further instability: with extreme weather events wiping out harvests and putting key growing regions at risk.
And that volatility is only expected to continue moving forward.
“In the context of raw materials, there’s a huge amount of uncertainty in their price,” explained Tristan Fletcher, CEO and founder of ChAI Protect.
“That exists for companies of all sizes, whether packaging materials that biscuits are put in, or what they’re made of: the cocoa, wheat or sugar.
“Up to this point, only large organizations were able to mitigate that uncertainty. And that uncertainty means, in some cases, there’s an existential risk if you’re making something with a very thin margin... as many food and beverage businesses are.”
The solution, says Fletcher, is an insurance product that protects against price fluctuations: which is what ChAI offers.
Large companies have had the option of various risk mitigation strategies, such as complex hedging strategies and an investment bank’s derivatives trading team. But ‘black swan’ pricing events have become the new normal and executing purchasing strategies has become harder and harder.
So ChAI is already being used by large publicly traded firms and is underwritten by tier one, A-rated underwriters.
But the product is of particular note to SMEs: for whom larger hedging tools have been out of reach.
Instead, an insurance product gives then a method they understand. And in some cases, it offers cover in areas that hedging does not.
ChAI is able to draw on AI insights gathered from a wide variety of sources. That could include satellite images that looks at what crops are growing; crop yields; weather data and precipitation; right through to global shipping movements and consumer trends.
These data sets can then be drawn together and analysed to create a clear picture of the industry.
The commodities market forecasting can therefore create an understanding of the probability of any price being hit over a 12 month period. These insights allow ChAI to price insurance premiums for price indices ‘matching any conceivable contractual obligations with suppliers, simulate underwriting portfolios and enable the ability to offer premiums that reflect the true risk of a price being hit’.
And what’s more, it can even assess the accuracy of its predictions.
“Every time we make a prediction, we know how confident we are in it,” said Fletcher. “So it’s not so much about knowing with certainty: it’s knowing how much certainty you have. And that’s what AI is good at. It’s really important when you’re chaining together lots of views in the world, particularly when they’re inconsistent.”
‘It’s an entirely new category of insurance and risk management’
ChAI is, says Fletcher, a tangible example of how AI can be used to transform industries for the better.
It’s not only about democratizing access to raw materials: it’s about building entire industries.
That’s the case when it comes to recycled plastic in beverage bottles or other packaging. Brands may wish to up their recycled content in principle: but face struggles in sourcing the raw recycled plastic pellets to use.
In this situation, derivatives markets simply don’t exist: meaning companies are reluctant to adopt the use of the material and that in turn has hampered the adoption of a circular economy.
ChAI can change that: by offering insurance and protection to those wishing to increase purchases of recycled plastic.
Deep data insights
“Industrial supply chains face increasing price volatility in commodities with the majority unable to access hedging tools,” said Richard Chattock, CEO of Insurtech Gateway.
“ChAI’s new insurance product solves this problem. We were really impressed by ChAI’s deep data insights into market and pricing dynamics, and are looking forward to supporting them as they scale this new product.”
The company’s main mission right now is to educate the market and communicate the new concept, which is an ‘entirely new category of insurance and risk management’
“This is a world first in de-risking the supply chain using insurance,” said Fletcher. “It’s a very tangible use case for AI. We often hear about AI in a very abstract way: but here’s how we’re using it to help people switch to raw materials they can offset the risk of. They can do so because of AI.”
ChAI is backed by venture capital fund Seraphim Space with participation from Insurtech Gateway, Passion Capital, Primo Space, 2050Cap, MMC, Dynamo and Portfolio Ventures.