“Broadening Our Reach” was the theme of WRMA’s 12th Annual Meeting, held on May 10-12, 2010 in Miami, Florida. The meeting showcased how wide the market’s reach has become with a packed audience of over 75 people hailing from North America, Europe, India and Australia.
Thinking broadly was one of the suggestions of keynote speaker Stephen Dubner, co-author of Freakonomics and SuperFreakonomics. Solving problems means looking at them from a different viewpoint, he says, noting that “the person who solves the problem is usually the one who seems the least likely person to solve it.”
For instance, hurricanes are no mystery. “We know where, when and why they happen,” says Dubner. What’s needed is a way to dissipate the storms before they can cause damage. At least one think tank is trying to develop methods to disrupt the formation of hurricanes, but caution is needed. Dubner points out that unintended consequences are the biggest challenges for any new method of altering nature.
Nature’s impact on agriculture and weather risk management’s role in mitigating that risk was the focus of the Agriculture Panel. There are emerging agricultural markets where no crop insurance exists, creating a opportunity for the weather market. For example, in Florida, strawberries, watermelons and peaches aren’t covered by US Dept. of Agriculture crop insurance. The challenge is convincing farmers that weather risk needs to be offset.
In Canada, there’s good potential for weather risk tools to be used by aggregators and processes. Custom solutions must be developed to meet specific needs of these markets.
The weather risk market is driving more detailed forecasting of the daily weather as well as storms, noted panelists on the Forecasting Panel. The more granular the data, the better it can be used. Plotting the differentials between ridges and valleys is now possible, giving farmers better forecasting tools. Data for factors such as soil moisture, sunspots and El Nino are increasingly in demand.
At the time of the WRMA Annual Meeting, there was a great deal of uncertainty about the final outcome of financial regulations in the US and Europe. Since the meeting, the US Senate has passed its financial regulation bill, but questions remain about its impact on the weather market.
In Europe, the European Union’s hard line on financial regulation is softening a bit, so that small and medium businesses aren’t snuffed out.
Many in the weather risk community are awaiting a US Supreme Court ruling on the Bilski v. Kappos case. At issue is whether or not a method of processing weather data can be patented. A ruling on the case is expected before the Court recesses later in the summer.
Increasing liquidity and reducing complexity in the weather risk market were the subjects brainstormed by the Trader Panel. Panelists mentioned that for some sectors, such as energy, there are just too many weather cities, making it hard for energy traders to pay attention to weather. One suggestion was to have a focus on just few cities on the Chicago Mercantile Exchange. Attracting end users remains a challenge, panelists agreed. Encouraging more speculators to enter the market might be one way to boost liquidity.
Asked how meteorologists are adding value, the panelists revealed that their “met guys” are a good source of not only weather data but good insights, helping them to execute trades more efficiently.
The ILS Panel discussed how much the market has diversified in the last five years. There are now many instruments that can be used to mitigate weather risk – industry loss warranties (ILWs), cat swaps, cat bonds, futures and collateralized reinsurance. Weather events such as earthquakes and hurricanes have spurred the development of these products. Further, strong interest from pension funds is buoying the market.
The natural gas markets in Europe and Australia are providing opportunities for weather risk tools as the energy markets seek to mitigate price risk. Forward electricity markets in Australia are also becoming a natural fit with weather.
Some non-traditional markets are opening up. In the Netherlands, the phase out of insurance for construction is creating new demand for weather products. In Asia, there have been forays into weather risk coverage for drought, hydroelectric production and rice production in southeast Asia and China. And in South America, an innovative deal involving precipitation and crude oil was done last year as a way to mitigate hydroelectric production shortfalls.
India remains a growing market for weather risk management products. Weather indexed insurance is becoming more popular as a tool. Yet growth of weather indexed products is hampered by lack of weather data in some cases.
Basis risk was mentioned as a challenge for India but the subject also was discussed during many of the panels. Getting end users to be comfortable with the basis risk involved in weather hedges is going to take a lot of end user education, but the result would be a more liquid market.
As WRMA continues to broaden its reach, many attendees are planning to travel to Krakow, Poland for the 11th European Meeting to be held September 15-17, 2010 as well as the WRMA meeting to be held in Australia during the first quarter of 2011.