Thailand looking to hedge flooding with water-level or rainfall derivatives

by Artemis on December 14, 2011

Thailand’s Securities & Exchange Commission may look to weather derivatives as a mechanism to allow investors to hedge the risks of disasters like this years record floods. According to Bloomberg, the Thai regulator is exploring the possibility of bringing water derivatives or rainfall derivatives to market to enable away for protection to be bought and sold to hedge the impacts of future flooding.

The Thai commission are being extremely innovative about this, which is great to see, and are proposing to link financial contracts to either rainfall or the level of water in Thailand’s dams. That second idea is really where this market needs to get to eventually if it’s to properly hedge the risks of flooding caused by swollen rivers. We’ve discussed this on Artemis in the past and river level monitoring is certainly the most reliable way to allow the hedging of floods, as it is much more difficult to actually predict where rainfall will go within a flood plain. If Thailand could get this right they may be able to issue flood catastrophe bonds as well as launch derivatives.

Thailand’s prime minister said last week that the flooding may have caused as much as $41.6 billion of economic losses, making this a peril which really does need a better hedging solution than just traditional re/insurance.

Vorapol Socatiyanurak, secretary-general of the SEC, declined to say when trading might begin in any derivative instruments. “Flooding has become more frequent in Thailand, with much greater economic impact,” Vorapol said in an interview in Bangkok yesterday. “The new security would offer investors, insurers and manufacturers an instrument to help alleviate financial losses in future catastrophes.” He also pointed out that the instruments could protect rural farmers and residents from the impact of floods as well, almost like microinsurance.

If Thailand can get a reliable monitoring network in place for their rivers and dams then they will be able to call on a wide range of risk transfer tools including weather derivatives, weather-index insurance, parametric insurance products and even catastrophe bonds. It’s really encouraging to see Thailand thinking outside the norms and looking at their risk transfer alternatives seriously.

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