The weather risk transfer space remains in its infancy but conditions are similar to that seen in the catastrophe market pre-2005, suggesting ample opportunity for innovation and expansion, according to Richard Oduntan, a Portfolio Manager at Nephila Capital, the world’s largest reinsurance-linked investment manager.
As opposed to natural catastrophe risk transfer that concerns events that cause catastrophic damage, weather risk transfer refers to day-to-day weather events that impact business revenues.
To date, the insurance-linked securities (ILS) relationship with the weather risk transfer market has been minimal, with 2016 witnessing just the second weather risk catastrophe bond transaction, in Market Re Ltd. (Series 2016-5), which came roughly seven years after Kelvin Ltd., the first such deal as recorded by the Artemis Deal Directory.
In a recent interview with Clear Path Analysis, Nephila Capital’s Oduntan explained that the “weather risk transfer market today is more like the cat market pre 2005.
“It is ripe with opportunity. This is a unique asset class, whereby investors may not have exposure as of yet.”
For investors, as an asset class the weather risk transfer market offers low-correlation with broader financial markets, much like the catastrophe bond space and other elements of the ILS world.
Furthermore, weather risk transfer supports the development and increased resilience and sustainability of emerging economies such as farming in Africa, explains Oduntan, which is attractive to investors that want to invest in more socially and economically developmental asset classes.
The growing awareness of weather risk transfer and willingness to participate in such deals by investors in the space, is combining with technological advances and more available reliable and accurate data.
Oduntan explains; “It has taken years to get to a level of sophistication of where we are now. Ten years ago, if you wanted to do a weather deal, you needed to have a ground based weather station. But this is now changing because there is publicly available satellite data through government institutions such as NASA, which allows us to analyze weather risks and settle transactions all over the world. The increased availability of data has made it possible for us to access new markets.
“There has also been a lot in the news in recent years about extreme weather, and climate change. These things have created interest amongst companies in general.”
Despite being broadly applicable across many industries around the world, currently, many weather risk transfer users are from the energy and agricultural markets, explains Oduntan.
This isn’t so surprising when considering the energy market and wind energy, for example, which is dependent on wind and so highly suitable for weather risk transfer.
Artemis discussed previously that analysts at GCube Underwriting Ltd. underlined weather risk as the greatest threat to the wind energy industry, highlighting both the value and necessity of reinsurance and capital markets capacity to mitigate the risk.
The weather risk transfer market has the potential to expand in terms of location and risks covered, although it’s clear that energy markets and agricultural sectors are extremely well suited to this marketplace.
JLT Capital Markets, which participated on the Market Re Ltd. (Series 2016-5) catastrophe bond transaction, discussed at the time how ILS was well suited for the transfer of elemental cat risks and weather risks, and it does appear that both investor and sponsor understanding and appetite for weather risk transfer is growing.
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