Insurers driving growth of weather futures contracts
Insurers and international brokers are driving an increase in the weather derivatives market. The number of weather risk management contracts transacted globally nearly tripled from April last year to March compared to the year before, according to an industry survey.
Head of consultancy at weather risk management specialist Weather Xchange, Duncan Wilson, said insurers were a "significant" force behind the trend, accounting for "at least a third" of the increase.
Weather derivatives allow contracts to be traded based on weather data, such as temperatures, rain or wind. Insurers can use weather derivatives to hedge against exposures such as very hot summers, freezing winters or heavy rainfall.
Weather Xchange, a joint venture with the Met Office, last week announced plans to jointly develop global weather futures and options contracts with the Chicago Mercantile Exchange, the largest futures exchange in the US. Wilson admitted the weather derivatives market was "nascent", but he said the establishment of successful European futures contracts would help weather derivatives into the mainstream.
Wilson said: "I see them being offered as an alternative form of risk cover. Where you can't get what you want in an insurance market you might look on the weather derivatives market."
But Andrew Guy, director of Mako Financial Markets, Europe's largest market maker of exchange traded options, warned that until the weather derivatives market grew much larger it would suffer from lack of liquidity.
"The market is very narrowly defined," he said. "Until you can find a private investor, a pension fund or a hedge fund willing to trade, you will have a lack of liquidity."