Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Weather derivatives market grew by 20% in 2010-2011, says WRMA


The weather derivatives market while not receiving a huge amount of press in the last year, has been quietly growing in size as end users of weather derivatives and associated weather risk management tools increase in number and diversity. The Weather Risk Management Association has announced the results of their latest survey of the weather derivatives market, which they conduct with the help of PricewaterhouseCoopers LLP (PwC), at their 13th annual meeting in Houston, Texas on Friday.

The survey, which looks at the state of the weather market from 1st April to 31st March, it’s size and areas of growth, found that the market for customised weather derivatives grew by nearly 30% in the past year while the overall market grew in size by 20%. The total notional value for OTC traded weather risk contracts rose to $2.4 billion while the overall market grew to $11.8 billion.

Worldwide temperature derivative contracts are the most traded customised weather hedge. The survey shows that over the past year growth has been seen in usage of rainfall, snow, hurricane and wind contracts. The WRMA says this is representative of a wider range of end users and a wider range of industries (such as agriculture, construction and transportation) starting to hedge their weather risks. Growth was seen all over the world with Europe seeing the biggest increase in trades but North America, Asia and Australia also seeing healthy growth.

Interestingly, the interest from the construction industry has grown dramatically, it accounted for 7% of enquiries about weather risk instruments in 2009, while in the last year it accounted for 23%. Transportation interest grew from 2% to 5% of all weather risk enquiries.

On the number of contracts traded, summer contracts were up 150%, winter up 163% while overall number of weather contracts traded were up 159%, impressive growth for the sector. Customised temperature derivative contract use has grown significantly while usage of heating degree-day (HDD) and cooling degree-day (CDD) contracts has fallen by comparison as a percentage of the market, probably explained by end users choosing to customise their weather risk protection more often now the market is maturing.

On the Chicago Mercantile Exchange (CME) where weather contracts can be traded, summer contracts grew by 25%, winter by 12% and overall number of contracts traded was up 19%. The CME is still largely dominated by HDD and CDD weather risk contracts.

“The growth in the customized weather derivatives market shows increasing participation from a wide variety of end users who recognize the value of actively managing their weather risk,” said Bill Windle of RenRe Energy Advisors who is the current WRMA President. “The increased balance between the exchange-traded market and the OTC market demonstrates a greater interaction between market participants which creates a strong platform for future growth.”

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

Artemis London 2022 - Insurance-linked securities conference in London

Get a ticket soon to ensure you can attend. Secure your place at the event here!

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.