New member profile: Paratus Group
Recently elected Baltic Exchange member Paratus is offering shipowners and charterers a new way of managing their freight and bunker risks through parametric insurance policies. Paratus offers clients the ability to buy an insurance policy which pays out if freight rates or bunker prices reach a certain pre-agreed level.
Parametric insurance is a fast-growing concept in the insurance market and one which is used in a wide variety of industries, most commonly for weather related events. The Paratus policy pays out policy holders if a parameter or index threshold is reached or exceeded, currently covering marine fuels, freight (wet and dry) for charterers and owners, LNG and carbon emissions, with jet fuel for commercial airlines launching imminently.
According to company founder Gus Majed, a former oil trader at Shell and derivatives partner at energy trader Vitol, the concept can be used successfully in the commodity markets. It allows users to use the financial strength of the Lloyd’s underwriting market to transfer their balance sheet risk.
“Shipowners and charterers understand and trust insurance: they buy a lot of it,” explains Gus Majed. “They’re also legal experts and understand contracts and they’re of course transport experts.”
In other commodity markets, hedge finance is often available on the basis that finance can be raised against the commodity itself. But freight is a cash-settled service, not a physical commodity, and hedge financing is not available for FFAs. Paratus claims that a parametric insurance policy side-steps this problem, allowing the owner to buy a simple policy.
The idea behind Paratus started out in the airline business in 2016, where Majed was advising some of the largest airlines in the world at the time on their jet fuel price risk exposure.
“For an airline facing $10bn a year in expenses, perhaps $3bn of this will be fuel costs. They face big mark-to-market exposure,” he explains.
But once he turned his attention to the shipping industry, Gus Majed says that he also became aware of the problems faced by bunker managers, procurement managers and accounting departments. Here, physical oil is seen as an expense, while derivatives are hedges and must be treated separately from an accountancy perspective. There is also the risk of pricing the hedges.
“We took a step back and said, what do they all understand and how do we solve it? Why can’t we look at an insurance product that takes away the need for very expensive oil traders and risk managers, margin calls and financing?”
Gus Majed believes that only 3% of the 4m barrel a day bunker market is currently hedged, mainly because the market is so fragmented and banks are unwilling to extend credit.
His eureka moment came when he realised how much oil price risk a typical shipping company faced.
“If a hedge fund had this level of exposure, they’d normally be employing a small army of traders to manage the risk. This is not something which transport companies are able to do.”
He also notes that insurance is just another expense and therefore, like hull insurance, is tax deductible.
Paratus was set up in May 2020, is based in London and Guernsey and regulated by the Gurnsey Financial Services Commission. It transfers risk to various underwriters in the Lloyd’s market which are rated “A+” by Standard & Poor’s and “AA-“ by Fitch Ratings. The team is 20 strong with experience of oil, shipping, power and gas trading as well as insurance expertise. Its board of advisors includes former Lloyd’s of London chief executive Richard Ward, former global head of distillate trading at Vitol, Kenya Matsumoto, and former head of transport law at Norton Rose Fulbright, Harry Theochari.
According to Gus Majed, Paratus is aimed at both companies which have never used derivatives products and just need a simple product as well as more sophisticated operators.
“For the more sophisticated operator, it’s all about pricing. Our pricing is aggressive, fair and transparent.”
The company has partnered with shipbroker and Baltic member Gibsons to market the service.
See www.paratusltd.com for further details.
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