Weather Trading Glossary

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

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Retention of risk by the policyholder calculated by reference to the total of claims to be retained.

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Option that can be exercised at any time up to expiration

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Retention of risk by the policyholder, calculated on the basis of retention of claims in total over a year

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The average of the daily high and low temperatures

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Mixture of insurance/reinsurance and other risk management techniques on a single policy

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Capital instrument issued by government or private corporation. Redemption may be linked to an event (eg. CAT bond)

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An exchange where financial instruments are traded

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Gives buyer the right to buy, seller is obliged to sell. Payout occurs if the derivative exceeds a predetermined strike level

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The maximum payout of a call option. Also known as a call spread

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Common term for a catastrophe

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A combination of a Put and a Call. Gives protection against reduction in revenue while foregoing a proportion of the profit

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Credit made available related to specific events and limits

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Contract to supply equity at fixed interest

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Contract where future liability is based on difference (eg. an index price above a fixed minimum)

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Share that can be converted to another class (eg. debenture (fixed interest) to an ordinary share)

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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 […]

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Formula to measure the insurable risk of a company

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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

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Sum of the daily Heating or Cooling degree days over a specified period

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Company or entity set up for a specific purpose (eg. reinsuring catastrophe risk)

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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

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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

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A financial contract the value of which is derived from another (underlying) asset, such as an equity, bond or commodity

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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

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Can only be exercised on the expiration date. The majority of weather options are traded as Europeans

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Derivatives that are either complex or are available in emerging economies (plain-vanilla) – typical exchange traded

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The expected value of an option at payout

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Borrowing at fixed rate

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Borrowing at a pre-determined variable rate

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Maximum payout of a put option. Also known as a put spread

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Commits user to buying or selling and asset at a specific price on a specific date in the future

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Expenses of providing a service

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Forward contract that is traded on an exchange

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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 […]

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Act of reducing risk

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The cumulative number of degree-days, or another weather condition over a period for a specific location

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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

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An exchange of financial instruments to give each party their preferred position

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Option in which all payouts occur as a flat amount, and not per unit

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Amount of money put at risk by a derivative is much bigger than the down payment that was made when it was traded

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A contract which gives the buyer the right, but not the obligation to buy or sell a particular asset at a particular price

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The date when the holder has the right, but is under no obligation, to exercise the contract

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A derivative that is not traded on an exchange but purchased from an investment bank

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The amount an option/swap buyer/seller receives/pays

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Opposite to an experience account. Money is moved from the experience account to the payment account to be specifically paid out in losses

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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

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Collective name for moisture, in liquid or solid form, which falls from the atmosphere

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Amount paid to purchase an option

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Amount representing capital base

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A promise to repay the principal on defined terms

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An investment opportunity which requires no registration with the SEC

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Gives buyer the right to sell – buyer has to buy

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Give priority in payment of interest in shares of capital, redeemable shares can be bought back by the insurer

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PCS Option contracts which limit the aggregate amount of losses that can be included in the contract to $20 billion

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Someone who wants to accept a risk because of the likelihood of substantial profit

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Contract which uses a formula to spread the cost of losses over a number of years

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Option on difference between two contracts

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Price where future or option contract operates

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Additional funding to augment policyholder surplus in times of need

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Two companies exchange cash flow linked to a liability or asset

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Measure of the degree of heat or cool of a substance

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Term to describe a specific class of bonds within an offering, usually each tranche offers varying degrees of risk to the investor

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Fund established to safeguard resources

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The separation of different elements such as loss control from the actual risk financing

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The effect of demand on revenue

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A risk borne by an organisation or individual which is due to climate volatility

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Product which allows buyer to partially or fully offset climate related risks

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An investment which doesn’t correlate with an index or market results

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Security where no interest is paid

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