The fast-expanding insurance market based on bad weather risks is set for a major boost with the opening of a virtual trading system.
The Internet Weather Derivatives Exchange, or I-WeX.com, will soon allow companies to trade in weather-related financial products or derivatives.
Launched by e-commerce minister Patricia Hewitt, the market will enable firms operating in temperature sensitive markets such as agriculture and energy to hedge against financial losses from extreme weather conditions.
David Gamble, executive director of AIRMIC, welcomed the move on behalf of his risk manager members and said: "In AIRMIC's recent survey of 21st-century risks, extreme weather conditions came into the top ten emerging risks facing both organisations and society."
Willis with Aon will broker deals as market makers on the exchange, which is linked to the London International Financial Futures and Options Exchange (LIFFE).
Oliver Prior, research and development director for Willis, said the market was like a reinsurance tool.
"It is pretty much a trade index against which firms bet and are paid for every unit that deviates from the index mean, or in this case the average yearly temperature."
He said the market also reflects the remarkable convergence of insurers and banks, known as "bancassurance".
While banking facilities will be offered to allow buyers such as energy companies to trade directly, the market's capital is expected to come from brokers and insurers.
"This index is the first to allow trades by both the financial and insurance markets," said Prior. "It offers flexibility and has tax advantages. It will also let companies fix their budgets with regard to energy use, thereby increasing price stability."
As well as bulletin services, the market will offer on-line pricing models and weather data services.
