Aon  |  Financial Institutions Practice

The complex global commodities financing supply chain is continuously evolving. In navigating this volatile risk landscape, stakeholders can encounter risks in all directions.

From operational risk to physical inventories, to credit risk with counterparts, to political risk associated with the resetting of trading alliances, and technology risk associated with the exploration of blockchain/shared ledger applications, fraud risk is an increasing threat.

Global pressures are driving commodity fraud risk

Supply chain intermediaries compete to add value to clients by maintaining large volumes of stock on hand to enable “’just in time”’ delivery to clients. Increasingly limited storage space now carries a premium price tag across Europe and the United States. These pressures are causing businesses to divert their storage away from their established partners - entering new environments that can increase the likelihood of fraud.

Hiding behind the veils of distance, time, custom and language, fraudsters will seek to elude detection and make financial gain through ever-evolving fraudulent schemes.

While the first-party impacts can be severe, the ongoing financial and operational impacts can resonate across entire supply chains, bringing trade to a standstill.

Looking ahead: the solution

Demand for effective insurance is growing in response to these global pressures.

Traditional products such as Marine Cargo, Credit and Crime fail to provide sufficient scope to cover some exposures. Following decades of commodities document fraud being viewed by most underwriters as uninsurable, innovation in the insurance market is giving financial institutions and trading houses new opportunities to benefit from bespoke document fraud coverage.

By working with a leading global broker that is able to leverage insurance capacity across different regional markets, stakeholders in the commodities supply chain can secure access to increasing amounts of capacity being cultivated in the market with competitive terms and pricing.

Establishing and maintaining an effective risk management strategy for fraud, misappropriation and non-payment risks is critical. Financial institutions and trading houses are likely to benefit from reviewing the interplay of various insurance programs to ensure coverage both responds and remains cost-effective.