Mitigating Volatility and Maximizing Profits: A Guide to Risk Capital in the Food, Agribusiness and Beverage Industry

Mitigating Volatility and Maximizing Profits: A Guide to Risk Capital in the Food, Agribusiness and Beverage Industry
January 16, 2025 8 mins

Mitigating Volatility and Maximizing Profits: A Guide to Risk Capital in the Food, Agribusiness and Beverage Industry

Mitigating Volatility and Maximizing Profits: A Guide to Risk Capital in the Food, Agribusiness and Beverage Industry

In an industry with tight operating margins, FAB organizations face significant challenges in managing spend and protecting their financial health — requiring industry leaders to adopt a sophisticated approach to risk capital optimization.

Key Takeaways
  1. With tight operating margins, businesses need to optimize their use of both internal capital and external risk transfer solutions.
  2. Access to multiple forms of capital, from traditional insurance to alternative solutions, provides greater flexibility in managing volatility.
  3. A data-driven, analytical approach enables organizations to find the optimal balance between risk retention and transfer.

Commodity price fluctuations, geopolitical risks, cyber threats, supply chain disruptions and weather-related events have created a perfect storm of risks for food, agribusiness and beverage (FAB) organizations. As a result, less than a quarter of these businesses feel adequately prepared to handle the pressing threats they face.1

Top 5 FAB Risks

  Current Risks Future Risks
 1 Commodity Price Risk or Scarcity of Materials Commodity Price Risk or Scarcity of Materials
 2 Supply Chain or Distribution Failure Cyber Attack or Data Breach
 3 Business Interruption Climate Change
 4 Cyber Attack or Data Breach Economic Slowdown or Slow Recovery
 5 Climate Change Supply Chain or Distribution Failure

Source: 2023 Global Risk Management Survey, Aon

The industry's complex ecosystem can also complicate the challenge. Comprising a multitude of distinct sub-industries, from farming to food manufacture to grocery retail, each one faces varying levels of profitability and risk exposure. This diversity creates unique challenges in risk financing.

For this reason, traditional insurance markets are becoming more selective about FAB risks, because many of these challenges require a sophisticated approach to risk capital optimization. Plus, insurers are being more selective due to the sector's losses and risk profile. However, by leveraging a combination of solutions, such as captives, parametric insurance, alternative risk transfer (ART) tools and advanced analytics, FAB organizations can build resilience and safeguard their balance sheets.  

Opportunities in Risk Capital Optimization

Risk capital optimization offers several strategic benefits for FAB organizations. Quantifying key financial metrics enables risk transfer to be measured in value terms, allowing organizations to determine the right level of external capital to leverage. Additionally, the cost-efficient approach to risk management provides multi-year pricing stability and access to alternative capital sources. This offers a more proactive and aligned risk financing approach, reducing risk costs over time and more accurately matching business cycles. 

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Many companies are looking to optimize their capital in the most efficient way possible. However, the growing unpredictability caused by pricing, climate change and emerging risk has only increased turbulence within the FAB industry.

Ciara Jackson
Global Food, Agribusiness and Beverage Leader, Enterprise Client Group

The 4 Families of External Capital in Risk Financing

Modern risk financing strategies draw on four primary sources of external capital, alongside an organization’s own balance sheet:

  1. Direct (Retail) Market: While this is ideal for traditional risks, it is increasingly selective regarding natural catastrophes and social inflation, as these factors continue to drive up claim costs. Recent trends show volatility in appetite and pricing for many core operational risks.
  2. Facultative Reinsurance: This provides access to competitive pricing and abundant capacity for short-tail risks. This option creates greater flexibility by facilitating tailored risk transfer strategies for specific challenges.
  3. Treaty Reinsurance: This coverage ensures large, unobtrusive capacity for portfolios of risks. Its success requires collaboration with lead direct insurers to secure optimal terms.
  4. Alternative Risk Transfer: This includes structured reinsurance solutions, parametric solutions, catastrophe bonds and insurance-linked securities. These solutions can offer greater flexibility to address emerging and uninsurable risks efficiently.

Advanced Risk Financing Solutions for FAB Organizations 

The following strategies give FAB organizations greater control over their exposures and costs. Whether using their own captive insurance company, getting faster payouts, exploring alternative financing methods or using data tools to make smarter decisions, these solutions help businesses protect their profits and stay resilient against increasing volatility.

  • Risk Financing Analytics: Making Informed Data-Driven Decisions

    Risk financing analytics help organizations identify the optimal balance between risk transfer and retention by providing insight into the levels of risk organizations may be willing to assume and how much to transfer to insurance. Using tools can help simulate "what-if" scenarios to determine the most cost-efficient options while maintaining protection. These tools work by simulating thousands of scenarios to quantify potential losses, optimizing the total cost of risk through analysis of the long-term impacts of various financing strategies, and providing actionable insights to align risk financing with financial goals. 

  • Captives: The Foundation of Strategic Risk Retention

    Captive insurance solutions have become a vitally strategic tool for FAB organizations. By retaining key risks, captives reduce dependence on traditional insurance markets and offer tailored coverage for operational continuity. As well as being a risk retention tool, they are also increasingly used as the platform through which FAB organizations can optimize insurance and access alternative capital sources. For FAB businesses, captives help cover events like property damage or disruptions to operations when traditional insurance is too expensive or unavailable. They also help finance emerging risks, like cyber attacks and climate-related disruptions. 

     
  • Parametric Insurance: Precision in Risk Financing

    Parametric insurance offers greater flexibility, as coverage can extend to risks often excluded by traditional insurance. Advancements in data and analytics to support underwriting, along with tech-driven innovation, such as greater satellite imagery and Internet of Things (IoT) sensors, are enhancing accuracy and driving efficiency within this space. This type of insurance doesn’t wait to calculate exact damages. Instead, it pays out quickly when a specific event occurs, like a certain amount of rainfall or a storm reaching a certain speed. This reactivity to extreme weather is particularly relevant for the FAB industry and can result in rapid operational recovery as payouts usually occur within weeks.

  • ART: Expanding Risk Financing Horizons

    ART options, such as structured reinsurance, provide access to capital that complements traditional solutions. These tools are especially relevant as FAB businesses face cost increases and constrained capacity from traditional insurance coverage. ART gives organizations the ability to fix their programs over the longer term, manage volatility and potentially share in any upside in the event of more favorable claims experience.

70%

of Aon-managed FAB captives cover property and business interruption risks.

Source: Captive Benchmarking Survey 2023, Aon

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Managing volatility requires a longer-term view of your risk financing strategy. However, this is a different mindset and often many clients focus on the next renewal. Yet, instilling longer-term thinking can really benefit your balance sheet.

Guy Malyon
Strategic Broking Director, EMEA

Future-Proofing the FAB Industry

To future-proof their operations, FAB organizations must rapidly address risks — from rising prices to climate change, shifting geopolitics and evolving consumer habits. As a result, meeting the food security needs of a growing global population is getting harder, and businesses must now set new standards in agility and innovation to capitalize on opportunities. 

These interconnected challenges are contributing to rising costs and operational disruptions, with 30 percent of Aon survey industry respondents indicating they suffered losses as a result of increasing risks.2 Looking ahead, future risks like cyber threats, climate change and talent shortages are also emerging as critical concerns. However, despite being a key risk both now and in the future, only 13 percent of FAB respondents stated they had quantified the risk that climate change poses to their organization.3

Rapidly reevaluating operations and strategies around established and clearly defined risks, as well as newer evolving and emerging risks, will help organizations better prepare for future uncertainty, and at the same time, strengthen their ability to capture growth opportunities. Specifically, captives, parametric insurance and ART tools help ensure resilience in the face of risk, while advanced analytics provide the clarity needed to make better, more informed decisions.

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Our role as advisors is to help clients achieve the best ROI in risk transfer. Our deep understanding of the sources of capital available allows us to configure the optimal risk financing outcomes for the specific needs of FAB businesses.

Ciaran Healy
Global Captives Leader

The FAB industry’s unique challenges and today’s complex risk environment demand a sophisticated and tailored approach to risk financing. By combining multiple capital solutions with advanced analytical tools, organizations can create resilient programs that optimize costs and protect critical financial metrics.

Large organizations should use data and analytics to strategically manage their risk. The goal is to carefully determine the optimal balance between transferring financial risks to external insurance markets and retaining those risks internally. By analyzing different strategies and capital management techniques, these businesses can develop a more sophisticated approach to protecting their financial resources while maintaining operational flexibility and economic efficiency.

1 2023 Global Risk Management Survey, Aon
2 Ibid.
3 Ibid.

Aon’s Thought Leaders
  • Ciara Jackson
    Global Food, Agribusiness and Beverage Leader, Enterprise Client Group
  • Ciaran Healy
    Global Captives Leader
  • Guy Malyon
    Strategic Broking Director, EMEA

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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