Weather Risk Management: The Confluence of Atmospheric and Oceanic Science and Financial
TCS Building 240
Weather challenges a wide spectrum of businesses whose revenues, costs and financial performance are sensitive to weather. The weather risk market makes it possible to mitigate the adverse impact of weather through financial risk transfer instruments structured on atmospheric and/or oceanic data/indices (derivatives, parametric insurance, or other types of insurance linked securities).
The weather risk management market is positioned at the intersection of the financial engineering (insurance, commodity, and capital) and scientific (atmosphere and ocean) communities. Since the weather risk market's inception in the late 1990s, the industry has endured many evolutionary changes and economic extinction events (economic downturn of 2002 and The Great Recession). Throughout this changing background economic state, there has been one crucial constant -- the importance of accurate and reliable atmospheric and oceanic data and corresponding probabilistic analyses. From the initial trading-centric nature of the market (e.g. heating/cooling degree day futures) to the current structured solution stance (e.g. wind farm specific power price/multi-year wind velocity hedge), atmospheric and oceanic data has remained the life-blood, the hemoglobin of the industry. Looking to the future, the complexity of weather hedge solutions is likely to only increase, placing ever increasing importance on data availability (time and space), historical continuity/availability, and reliability of probabilistic assessments of underwritten risks in a background of apparent non-stationarity.
During the talk, we will take a journey across the past, present, and future of the weather risk management market -- underscoring key events/drivers that have shaped the marketplace as well as predictions regarding future products and required supporting data/analytics. We will delve into how/what weather and oceanic data are sourced, recalibrated, recentered, and simulated in support of the underwriting and portfolio management process. Numerous examples of transactions/solutions will be provided along the way to provide perspective and generate questions/ideas as to how new data sources and modelling techniques could be used to increase hedge effectiveness and uptake of weather risk management products.
The weather risk management market represents a tremendous opportunity for public/private partnership. In fact, I believe such collaboration is paramount to the overall success of the weather risk management industry (increasing product capabilities/effectiveness as well as increasing the acceptance of weather products within the financial continuum via education and transparency). It is my hope that by discussing the past, present, and future of the market, we will catalyze a dynamic discussion and create new pathways for collaboration.