Weather Trading Glossary

The Weather Trading Glossary is an alphabeticised listing of terms and phrases used by professionals in our market.

Aggregate Retention Retention of risk by the policyholder calculated by reference to the total of claims to be retained
American Option Option that can be exercised at any time up to expiration
Annual Aggregate Limit Retention of risk by the policyholder, calculated on the basis of retention of claims in total over a year
Average Temperature The average of the daily high and low temperatures
Blended Cover Mixture of insurance/reinsurance and other risk management techniques on a single policy
Bond Capital instrument issued by government or private corporation. Redemption may be linked to an event (eg. CAT bond)
Bourse An exchange where financial instruments are traded
Call Option Gives buyer the right to buy, seller is obliged to sell. Payout occurs if the derivative exceeds a predetermined strike level
Cap The maximum payout of a call option. Also known as a call spread
CAT Common term for a catastrophe
Collar A combination of a Put and a Call. Gives protection against reduction in revenue while foregoing a proportion of the profit
Contingent Credit Credit made available related to specific events and limits
Contingent Surplus Note Contract to supply equity at fixed interest
Contract of Difference Contract where future liability is based on difference (eg. an index price above a fixed minimum)
Convertible Share Share that can be converted to another class (eg. debenture (fixed interest) to an ordinary share)
Cooling Degree Day (CDD) Difference between the actual temperature, as determined by the average of the high and low daily temperatures, and 65 degrees F. For example, if the daily high temperature is 77 degrees and the daily low is 65 degrees, the actual temperature for that day would be 71 degrees. The CDD's for that day would be 6 (71-65). If the average temperature is less than or equal to 65 degrees, the CDD's for the day would be zero
Cost of Risk Formula Formula to measure the insurable risk of a company
Critical Day Option A day is termed critical if certain atmospheric conditions are met. The options payout becomes a result of the number of critical days rather than a cumulative degree day total
Cumulative Degree Days Sum of the daily Heating or Cooling degree days over a specified period
Dedicated Vehicle Company or entity set up for a specific purpose (eg. reinsuring catastrophe risk)
Deductible First part of loss borne by policyholder
Defeasance Used in connection with a bond issue, describes the amount of risk faced by holders of the bonds. A fully defeased issue means that principal and interest are at complete risk of loss
Degree Day Term created to better forecast demand for energy. Number of degree days is calculated from the difference between actual temperature and a previously set level (usually 65 degrees). Expressed in Cooling Degree Days or Heating Degree Days
Derivative A financial contract the value of which is derived from another (underlying) asset, such as an equity, bond or commodity
Disintermediation The process of eliminating the middle-man. Such as an insured going to the capital markets for insurance-like products without the use of a re/insurer
Domicile Tax haven
European Option Can only be exercised on the expiration date. The majority of weather options are traded as Europeans
Exotics Derivatives that are either complex or are available in emerging economies (plain-vanilla) - typical exchange traded
Fair Value The expected value of an option at payout
Fixed Rate Note Borrowing at fixed rate
Floating Rate Note Borrowing at a pre-determined variable rate
Floor Maximum payout of a put option. Also known as a put spread
Forward Commits user to buying or selling and asset at a specific price on a specific date in the future
Frictional Cost Expenses of providing a service
Future Forward contract that is traded on an exchange
Heating Degree Day (HDD) Difference between the actual temperature, as determined by the average of the high and low daily temperatures, and 65 degrees F. For example, if the daily high temperature is 55 degrees and the daily low is 35 degrees, the actual temperature for that day would be 45 degrees. The HDD's for that day would be 20 (65-45). If the average temperature is greater than or equal to 65 degrees, the HDD's for the day would be zero
Hedging Act of reducing risk
Index The cumulative number of degree-days, or another weather condition over a period for a specific location
Index Based Contracts Options contracts based on an index. The value of the derivative is derived from the index. Variation between actual losses and those derived from the index creates basis risk
Interest Rate Swap An exchange of financial instruments to give each party their preferred position
Knockout Option in which all payouts occur as a flat amount, and not per unit
Leverage Amount of money put at risk by a derivative is much bigger than the down payment that was made when it was traded
Option A contract which gives the buyer the right, but not the obligation to buy or sell a particular asset at a particular price
Option Expiry The date when the holder has the right, but is under no obligation, to exercise the contract
Over The Counter (OTC) A derivative that is not traded on an exchange but purchased from an investment bank
Payment Account Opposite to an experience account. Money is moved from the experience account to the payment account to be specifically paid out in losses
Pay-out The amount an option/swap buyer/seller receives/pays
Perfect Hedge A hedge which correlates perfectly with the risk. Insurance contracts enable perfect hedges because the contract either pays or doesn't depending on a fixed trigger
Precipitation Collective name for moisture, in liquid or solid form, which falls from the atmosphere
Premium Amount paid to purchase an option
Principal Amount representing capital base
Principle Amount Note A promise to repay the principal on defined terms
Private Placement An investment opportunity which requires no registration with the SEC
Put Option Gives buyer the right to sell - buyer has to buy
Redeemable Preference Shares Give priority in payment of interest in shares of capital, redeemable shares can be bought back by the insurer
Small Cap PCS Option contracts which limit the aggregate amount of losses that can be included in the contract to $20 billion
Speculator Someone who wants to accept a risk because of the likelihood of substantial profit
Spread Loss Contract which uses a formula to spread the cost of losses over a number of years
Spread Option Option on difference between two contracts
Strike Price Price where future or option contract operates
Surplus Note Additional funding to augment policyholder surplus in times of need
Swap Two companies exchange cash flow linked to a liability or asset
Temperature Measure of the degree of heat or cool of a substance
Tranche Term to describe a specific class of bonds within an offering, usually each tranche offers varying degrees of risk to the investor
Trust Fund Fund established to safeguard resources
Unbundling The separation of different elements such as loss control from the actual risk financing
Volume Risk The effect of demand on revenue
Weather Exposure A risk borne by an organisation or individual which is due to climate volatility
Weather Hedge Product which allows buyer to partially or fully offset climate related risks
Zero-Beta Asset An investment which doesn't correlate with an index or market results
Zero-Coupon Security Security where no interest is paid

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