Weather risk market climbs 76% in value

Environmental Finance - 5 June 2008

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London, 5 June: The market for weather derivatives last year was worth a notional $32 billion, according to a leading industry survey released this week.

The number of weather derivative contracts traded totalled 985,000 in the year ending 31 March 2008, up 35% from 730,000 in 2006-07. The notional value of the contracts rose 76% to $32 billion from $19 billion over the same period, according to the annual Weather Risk Management Association (WRMA) survey.

The figures reveal that the market is back on a growth trajectory, after a sharp drop between the 2005-06 and 2006-07 years, which saw notional value falling from $45 billion to $19 billion.

WRMA reported that the weather risk market is growing in terms of geography and diversity of participants. The market is expanding in India, Latin America and south-east Asia, as companies seek to offset weather risks related to agriculture and other sectors.

Insurance companies, banks, hedge funds and ‘end-users’ – those organisations that face actual weather risk – are active in the market. As evidence of a healthy increase in the volume of end-user transactions, the survey shows that the proportion of trades reported between WRMA members and non-members rose year-on-year.

“The activity we’ve seen this year is indicative of a strongly growing market,” said Martin Malinow, the newly elected president of WRMA and New York-based CEO of Galileo Weather Risk Management, a division of the White Mountains Insurance Group. “We have spent the last 10 years creating foundations for growth and we can now begin to reap the rewards,” he said.

The survey is conducted by PricewaterhouseCoopers and polls WRMA’s membership for the notional value of the contracts, contract types and regional breakdowns.

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