Weather-risk-related contracts continue to see higher demand, according to a survey of the industry conducted by PricewaterhouseCoopers LLP for the Weather Risk Management Association.
The number of contracts traded around the world totaled 730,087, from April 2006 to March 2007, including both over-the-counter, or one-time deals, and those trades conducted at the Chicago Mercantile Exchange. That number is down from the more than 1 million trades from the same period a year ago, but still higher than previous years.
"Last year was an outlier for various reasons, but not an indication of a trend," said John Stell, who presented the results for PWC on May 11 in Miami at the annual WRMA meeting.
The numbers, however, still point to a blossoming market that will continue to grow and diversify.
The weather market has had a chance to die slowly four different times, estimated Felix Carabello, CME Director of Alternative Investment Products and a WRMA director, but the market has proven it will not go away. At the CME's weather market, Carabello said, 2007 volume is up 34 percent over 2006. And the market set an all-time record in April for average daily and monthly volume and three daily records.
Part of the reason for this expansion could be the diversification of weather-risk products available. The CME this year launched a hurricane futures market, opening up an end of the weather curve that normally was not the most attractive to traders. Says Warren Isom, senior vice president at Willis Re Inc. and secretary/treasurer of WRMA, CAT risk is traditionally viewed as "lumpy" and "illiquid" to traders. CAT bonds increase the liquidity to somewhere between "cold cream" and "peanut butter." But hurricane futures markets such as CME's are more attractive.
Another part of the reason for growth is increasing demand from end users. Energy companies have been the leaders in hedging their weather risk, but now agribusiness could be coming in from the cold. Parametric indices based on rainfall, temperature and crop cycles, and products such as yield, price, fuel and irrigation cost hedges, offer coverages that farmers could use to mitigate risk.
"The beauty of it is," said Brian O'Hearne, managing director, environmental and commodity markets, at reinsurer Swiss Re, "the agriculture market knows what their weather risk is."
They just need to become familiar with these products, he said.
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July 1, 2007
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