Weather derivatives for wildfires? Could it work?

by Artemis on August 22, 2008

An interesting article has been released on the Livescience website. Written by Joanne Ho of the University of Washington it discusses some research she has been undertaking into ways to protect communities against wildfires and focuses on reinsuring the insurers who provide the cover for California fires. It mentions that by ensuring that people are covered sufficiently it could even help protect firefighters by making protection of homes less of an issue if it is understood that they will be recovered financially. The article goes on to discuss the use of weather derivatives as a mechanism for hedging wildfire risk.

Read the full article here.

There are definitely defined and measurable weather conditions which can cause wildfires but how you could actually correlate those to a fire occurrence accurately enough to create a traded market I am unsure. There are other factors involved such as accidental fires, malicious starting of fires or even fires started by a piece of glass which helps intensify the suns rays on some brush. Would any trader, insurer or exchange be willing to trade in or facilitate this kind of market with those kinds of unknowns?

It’s a very interesting thought though and certainly deserves further investigation. Creation of markets to help shore up insurers exposed to wildfire would help lower rates for homeowners significantly in exposed areas and also create more opportunities for those involved in the risk transfer market.

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