Korea to explore the expansion of weather hedging and insurance

by Artemis on June 30, 2017

In response to more unpredictable outbreaks of adverse weather events and conditions in Korea, the Korea Meteorological Administration (KMA) has called on the Korea Insurance Development Institute (KIDI) to expand the use of weather hedging and insurance, an area that insurance-linked securities (ILS) funds are prominent.

Weather risk temperature cat bondThis is according to a report by The Korea Times, which claims the government in Korea is encouraging insurance companies to develop and release a range of effective and affordable weather insurance solutions, as the country’s weather becomes increasingly unpredictable.

An official at the KMA, said; “As more weather damage has been reported in recent days, insurance products can be a way to hedge risks regarding weather. So far, Korea’s weather-related insurance is mostly for crops. The policies are to suggest various other areas that can be covered by insurers.”

The KIDI has reportedly said that it will finish its study sometime this year, with an official for the organisation explaining that once completed, “we will submit a report to the government and due processes will be followed if there is consensus between related bodies.”

General insurers in Korea typically release crop insurance or “contingency products” that protect losses as a result of adverse, or unexpected weather impacting outdoor events, like concerts or sporting events.

However, the KMA believes that solutions seen in other parts of the world that hedge weather risk through innovative insurance protection, such as in the U.S. and Japan, could be introduced in Korea to mitigate the detrimental impacts of unpredictable weather conditions.

Weather insurance solutions can hedge the risk of an unpredictably warm winter or cold summer, which can impact production for certain businesses, for example.

Weather hedging contracts, such as derivatives, weather-index insurance and other, parametric trigger contracts that are exposed to severe weather events or weather variability, are often backed by ILS funds or collateralized reinsurance providers, so any development in Korea could represent an opportunity for the market.

According to The Korea Times this isn’t the first the government has attempted to increase the availability and variety of weather insurance solutions. Roughly three years ago the financial authorities in the country relaxed regulation around weather-related policies in an effort to enable a greater number of insurers to turn weather data and information into indices and offer protection.

However, the take-up rate of these products remained minimal, with just a few companies releasing them.

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