Survey: Weather Risk Market Value Plunges 53%

June 3, 2009

The value of the global weather risk market plunged more than 50 percent in the last year, paralleling the downturn in global markets, according to a trade association survey released Wednesday.

The survey, conducted by PricewaterhouseCoopers for the Weather Risk Management Association, found the total number of contracts traded — both over-the-counter and exchange-traded derivatives — fell to 601,000 from 985,000 a year earlier, a drop of nearly 39 percent.

The notional value of the contracts was estimated at $15 billion, down from $32 billion a year ago, a decrease of about 53 percent. The survey covered the period from April 1 to March 31.

“It’s just mirroring what’s going on in the greater financial markets. We are surviving from the same pool of capital,” WRMA president Martin Malinow said. “We’ve had a financial storm over the past year that’s destroyed trillions of dollars of capital.”

The $32 billion figure for the 2007-2008 survey period was an increase from $19 billion in the previous year.

The survey has been conducted since 2001. During that period, the largest total market value found was $45 billion in the 2005-2006 period.

WRMA, an 11-year-old trade group, said temperature-related contracts remained the bulk of the trades, while contracts for rain-related weather increased.

The number of weather contracts traded in Asia rose significantly from a small base, to 6,837 from 1,940. In Europe, the number increased to 34,068 from 25,290.

“WRMA is pleased to see increased interest for weather risk mitigation in Asia, Australia and Europe,” Malinow said.

The majority of trades were on the Chicago Mercantile Exchange, the group said.

Weather risk contracts allow energy, agriculture and other companies to hedge business downturns and losses from hurricanes and other windstorms, rainfall, temperature anomalies and weather events.

Energy, commodities, insurance and other markets have paid increasing attention to weather risk since the devastating Atlantic hurricane seasons of 2004 and 2005, when seven powerful hurricanes caused about $165 billion in damage.

U.S. Gulf energy fields were particularly hard hit and Florida citrus crops and housing stocks sustained significant damage. (Editing by Jane Sutton and Lisa Shumaker)


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