A very interesting new hurricane risk instrument has come to light today in a press release from Weather Risk Solutions, LLC (WRS). The full press release is available here.
HuRLOs are Hurricane Risk Landfall Options, a new derivative product devised by WRS which will begin trading on October 7th using their electronic trading platform and cleared by the Chicago Mercantile Exchange (CME).
HuRLOs are very interesting in that they offer an easily accessible and simple to understand way to hedge against landfalling hurricanes. Contracts can be bought which correspond to a hurricane making landfall in a specified coastal county or region, should a hurricane hit a county or region where you have purchased a contract then you’ll be eligible for a payout. Particularly of interest is the fact that the risk pool (made up of market participants funds) pays out, therefore making the market responsible for it’s own losses. Also novel is the fact that for every hurricane there is a ‘No Landfall HuRLO’ which can be bought and in essence is a bet that the hurricane won’t reach the coast. It’s a similar model to some prediction markets but with official clearing backing it has the potential to be a highly liquid marketplace.
It will be very interesting to see how this new instrument is embraced by the market. Alternatives exist in the form of Carvill Hurricane Index futures and options or catastrophe derivatives traded by the likes of Evolution Markets, but HuRLOs sounds like they could be much easier to understand to average businesses based in hurricane prone regions which could give them the edge. Our guess is that it will take the threat of a U.S. landfalling hurricane to really see how much interest there will be.
Read more detail on HuRLOs here and reply to this post to let us know what you think!
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