Exchange-traded weather insurance products set for launch in India

by Artemis on September 4, 2015

Once again the discussion of exchange-traded weather risk management products for Indian farms, companies and insurers has come to the fore, but this time the plan is for a product to be launched after September of this year.

The National Commodity and Derivatives Exchange (NCDEX) of India has been developing weather-index insurance and derivative based weather hedging products, which it wants to make available for trading on its exchange.

However the current regulatory environment doesn’t allow this type of product, so the NCDEX is waiting for the merger of the commodities regulator, the Forward Markets Commission (FMC), and the Securities and Exchange Board of India (Sebi) which is expected to complete by the end of September.

Once the merger of the two regulators has been completed the regulatory environment will allow the NCDEX to launch a suite of weather risk hedging and exchange-traded insurance and reinsurance use products to the market.

The Business Standard reports that Managing Director and Chief Executive of NCDEX Samir Shah told the media at an event organised by reinsurance firm Swiss Re; “We are planning to launch exchange-traded weather insurance products once the merger of FMC with the Sebi is completed.

“At present NCDEX is being regulated by FMC and there is no provision under FMC rules to launch any such product. In contrast, Sebi allows such products.”

Shah explained that the products would be sold initially by brokers, but the any claims would be settled by NCDEX.

“The products will be sold to farmers, insurers and other players like warehouse owners whose activities are linked to weather and the price of the product will be determined by the market and index will be traded at the exchanges,” he continued.

Insurers will be able to use the exchange-traded product for their own risk management and reinsurance purposes, Shah said, but would have to seek regulator approval to purchase the product.

NCDEX will work with companies like Skymet Weather Services, a provider of weather data and forecasts in India which has been planning for the launch of weather derivative indices on commodity exchanges for some time.

The idea of an exchange-traded weather derivative or insurance product has been ongoing in India since as far back as 2008, when Artemis first covered the possibility. The efforts have been hindered by regulation, appetite, the fact that the potential user-base was not very large that long ago, but today the chances of actually getting a product to launch finally seem more assured.

Skymet has been working on its weather data services with an eye on exchange-trading since 2012, so much of the groundwork is likely in place. This final hurdle, of the regulator merger, may be the last piece of the puzzle that needs to fall into place.

Weather-index insurance has gained favour in India as a microinsurance product, but the application of index-based insurance or derivative contracts traded openly over an exchange could result in a greater uptake by commercial business users exposed to weather variability.

The NCDEX’s job will be to construct the indices from the data, operate them on the exchange and provide settlement, against the index, for the products. At some point in the future it may even be possible to buy the products directly on the exchange, rather than having to go via a broker.

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