Strong Demand for Weather Risk Management Contracts, Group Says

Demand for weather risk management tools – futures, derivatives and insurance – continues to be strong worldwide, according to The Weather Risk Management Association (WRMA), the international trade group representing the weather risk industry.

The results of WRMA’s latest industry survey clearly indicate that the risk management lessons of the previous year — the warm weather during the winter of 2005/2006 and the summer of 2006 — haven’t been forgotten.

WRMA’s 2007 industry survey shows that the total number of contracts traded worldwide – both over-the-counter and on the Chicago Mercantile Exchange (CME) — was 730,087 for the period April 2006 through March 2007. That’s a decline from 2006’s total of just over 1 million contracts, but substantially higher than earlier years. The Annual Survey runs April through March to capture complete seasons of trade, i.e. winter and summer. Early indications for the next survey period point to the 2007 – 2008 survey results matching or exceeding the 2005 – 2006 figures.

The weather risk market continues to experience growth in some areas and adjustments in others, reflecting the market’s organic growth. Total contracts rose in the South to 121,170 from 118,169 in 2006. Meanwhile, Midwestern contracts showed a marginal decline to 317,363 in 2007, the East edged down to 212,278, and the West slipped to 60,924 contracts.

In Japan, a total of 301 contracts traded, all in the OTC market. In Europe, total contracts slid to 18,037 in 2007.

Warren Isom, WRMA Treasurer, adds, “We see rapid underlying growth in the weather business in other regions of the world, notably India, which are yet to be captured in our survey.”

“As the weather risk industry approaches its decade mark, WRMA is pleased to see the market validating the usefulness of weather risk tools,” says Gearoid Lane, WRMA’s President. “Weather risk management works well both in times of major weather events and in times of normal weather. The 2007 Annual Survey results show clearly that the weather risk industry is here to stay.”

Reflecting a shift from seasonal to monthly contacts on the CME, the value of contracts traded during 2007 dropped to $19.2 billion. While that figure is down from 2006’s record of $45.2 billion, the 2007 figure is substantially higher than other years. For instance, in 2005 the total value of contracts was $8.4 billion. In 2004, the nominal value of contracts was $4.6 billion.

Looking at contract types, the value of temperature-related contracts on both CME futures and OTC markets was $18.9 billion. Nominal values for rain and wind were steady at $142 million and $36 million, respectively. Meanwhile, traders of OTC contracts representing other contracts, such as weather contingent commodities, doubled to $65.8 million compared to 2006’s level of $34.7 million.

“The weather risk market no longer is a novelty to industries around the world. Agriculture, construction, banking, energy, insurance and other sectors see the real value in participating in the weather risk market,” Brian O’Hearne, Past President of WRMA and Managing Director of Swiss Re’s Environmental and Commodity Markets. “Weather risk tools are becoming essential to the bottom line of companies around the globe.”

WRMA engages PricewaterhouseCoopers LLP to conduct this annual survey to ensure that an independent third party collects and tabulates the data.

Source: Weather Risk Management Association