Managing Recyclables Price Risk – Is the Sector Missing a Partner?
Surabhin Chackiath, Principal, Waste & Resource Management, penned a blog for Insurance Post considering whether the reluctance seen in the waste sector to manage the price risk of recyclables offers up an opportunity to the insurance sector.
The piece was published on their website Insurance Post and can also be found below.
Over 6 million tonnes of recyclables (e.g. paper, card, metals, plastics, glass) are collected annually from 23 million households in England and the volumes are expected to increase further in the future. The responsibility for providing household recyclables collection service in England sits with c.320 local authorities, of which over 170 have contracts with private waste management companies for the provision of collection services.
Income from the sale of recyclables has the potential to reduce the total cost of recyclables collection services by c.20-40% but neither the local authorities nor the contractors are usually willing to wholly accept risks associated with recyclables price volatility. Recyclables prices can fluctuate significantly over the typical length of collection contracts (Figure 1) and therefore it is usually a strongly contested point in contract negotiations due to the impacts it can have on the financial sustainability of contracts (Table 1).
Local authorities, with their diminishing finances, are finding it hard to take on board service cost fluctuations from recyclables price volatility as they are seeking certainty in their short to medium term service budget forecasts, and therefore require contractors to provide fixed-price contracts inclusive of guaranteed income from recyclables. Private waste management companies consider it a significant risk for them to manage and therefore either risk price their contracts or do not participate in bidding for such contracts.
Figure 1: 7 year profile of recyclables unit price (developed utilising data from Letsrecycle.com)
Table 1: Proportion of recyclables sent for recycling from households in 2017 (source: www.gov.uk)
It could be argued that the local authorities are paying a premium, possibly a much higher premium than what is needed, for securing fixed-price recyclables collection contracts. Local authorities who provide recyclables collection services in-house (i.e. without contracts with external service providers) would need financial reserves to manage potential fluctuations to their annual service budgets from recyclables income.
It could be argued that this presents opportunities for a third party with diverse risk portfolio and risk management experience such as the insurance sector to step-in and provide innovative insurance or similar products to better manage risks from recyclables price volatility in collection contracts. Some of the advantages unique to providing a risk management product for recyclables contract are as follows:
- The number of customers, and therefore the associated marketing costs, are relatively low (c.170 recyclables collection contracts let in England are provided by c. 20 waste management companies);
- The value per deal/customer is likely to be higher compared to some other insurance products (e.g. home, car etc.);
- There are opportunities to provide longer term insurance from closing a single deal (for example the deal could cover the entire duration of the recyclables collection contract, which is usually c.7 years) and would help save on associated annual marketing or business development costs;
- Given the relatively lower number of clients, the provider who enters this sector first with a suitable product is likely to enjoy market monopoly and would be best placed to offer other products to these clients who often manage multi-million pound business portfolio; and
- There would be potential to expand the proposed service offering to other European nations and further afield.
It is possible that some insurance providers would be exploring options for entering this space and develop products to better manage risks associated with recyclables price volatility.
About the author:
Dr. Surabhin Chackiath is a waste and resource management consultant at SLR Consulting with over 10 years’ experience of negotiating waste and recyclables services contracts. Surabhin is interested in facilitating resolution of the current reluctance in the waste sector to manage recyclables price risk by working with interested parties to develop a suitable product/service.