Weather Trading Glossary

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

Option that can be exercised at any time up to expiration

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

The average of the daily high and low temperatures

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

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

An exchange where financial instruments are traded

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

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

Common term for a catastrophe

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

Credit made available related to specific events and limits

Contract to supply equity at fixed interest

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

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

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 […]

Formula to measure the insurable risk of a company

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

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

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

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

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

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

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

Tax haven

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

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

The expected value of an option at payout

Borrowing at fixed rate

Borrowing at a pre-determined variable rate

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

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

Expenses of providing a service

Forward contract that is traded on an exchange

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 […]

Act of reducing risk

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

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

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

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

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

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

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

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

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

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

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

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

Amount paid to purchase an option

Amount representing capital base

A promise to repay the principal on defined terms

An investment opportunity which requires no registration with the SEC

Gives buyer the right to sell – buyer has to buy

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

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

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

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

Option on difference between two contracts

Price where future or option contract operates

Additional funding to augment policyholder surplus in times of need

Two companies exchange cash flow linked to a liability or asset

Measure of the degree of heat or cool of a substance

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

Fund established to safeguard resources

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

The effect of demand on revenue

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

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

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

Security where no interest is paid