Price linked parametric cover

Price linked parametric cover protects margin and revenue against commodity price moves, paying a set amount when a recognised reference price crosses an agreed level.

It is one of the two structures in our commodity line, alongside volumetric cover, and it is built for businesses whose profitability swings with the price of an input they buy or an output they sell. Because it settles on an independent, published reference price rather than a lengthy claim, it gives fast, defined certainty when markets move sharply.

This page explains what price risk means for a business, how price linked cover works, the reference data behind it, how basis risk is managed, how it differs from a financial hedge, an illustrative example, the businesses it suits, and how to talk to us.

What price risk means for a business

Commodity price risk is the danger that the price of a key input or output moves against you. A producer is squeezed when the price of what it sells falls, a buyer when the price of what it consumes rises, and both when volatility makes planning and budgeting impossible. A sharp move can turn a profitable year into a loss, undermine contracts and threaten the cashflow that services debt. Because there is no physical damage involved, conventional insurance does not respond to price risk at all, so businesses are left to carry it on the balance sheet or manage it through financial hedging that many cannot easily access or run.

How price linked cover works

Price linked cover is built around a recognised reference price. You agree the price level at which cover attaches, the level at which it reaches its maximum, and the payout in between. It can be structured to respond to a price falling, protecting a producer whose revenue drops, or to a price rising, protecting a buyer whose costs climb. Cover can be binary, paying a fixed amount once the reference price crosses the agreed level, or scaled, so the payout grows as the price moves further against you, up to an agreed maximum. All of these terms are fixed in the contract before cover begins, so you know exactly what you will receive, and the payout follows automatically when the published reference price crosses the level.

The reference price and the data behind it

The trigger uses recognised commodity price benchmarks and exchange settled reference prices. These are public, independent and updated on a known schedule, which makes them ideal for a parametric structure: neither party can influence the outcome, and the settlement price and the window over which it is measured are defined precisely in the contract. As with every line, each reference is graded before it is used, on its history, its method and the risk of it being discontinued, so the trigger rests on a durable, transparent source that will keep reporting throughout the policy. See our guide to what data is used in parametric insurance.

Reducing basis risk on price linked cover

Basis risk on price linked cover is the gap between the reference price and the price you actually realise, which can differ because of location, grade, timing or contract terms. It is reduced by choosing the benchmark that most closely tracks your real exposure, matching the settlement window to the period over which you are exposed, and calibrating the attachment and exhaustion levels to the point at which a price move genuinely hurts your margin. Every structure is tested against price history so you can see how it would have performed across past moves before you commit, and the residual basis risk is set out clearly rather than hidden.

How it differs from a financial hedge

Price linked cover is parametric insurance, not a financial instrument, and that distinction matters. There is no margin to post and no position to manage: the terms are fixed as an insurance contract, and the payout follows the published reference price. That makes it accessible to businesses that cannot easily run, account for or access a derivatives programme, and simpler to place within a risk and accounting framework. It can sit alongside existing hedges to cover the exposures they do not reach, or stand alone for businesses that want protection without a trading operation. It is a complement to hedging, and often a simpler route to the same certainty.

An illustrative example

A producer whose revenue depends on the price of what it sells takes price linked cover that begins to pay if the reference price falls below an agreed level across the policy period, with the payout growing as the price falls further, up to a cap. If the market moves against it, the payout offsets the lost margin and protects the cashflow behind its commitments. This example is illustrative only, and the exact levels, payout and reference are set for each client individually.

Which businesses and sectors it suits

Price linked cover suits producers exposed to the price of what they sell and buyers exposed to the price of what they consume, across agriculture, energy and fuel intensive operations, food production and processing, and supply chain and trading businesses. Lenders to these sectors use it to protect the cashflows that service debt against an adverse price move. It is valuable wherever margin depends on a commodity price that the business cannot control. For the wider case against conventional cover, see why parametric insurance.

Common questions

Talk to us about price linked cover

If a commodity price move would threaten your margin, submit a risk and we will design a price linked structure around a recognised independent reference, tested against price history and backed by A rated reinsurance capacity. The exact structure of commodity cover is confirmed case by case, and it is written as parametric insurance rather than a financial instrument. Learn more about what parametric insurance is.