Mitsui Sumitomo launches humidity derivatives

Japan’s Mitsui Sumitomo Insurance has developed weather derivatives based on a temperature/humidity index, called a ‘discomfort-index’. They allow corporates to hedge their exposure to the risk of cooler and less humid summers in Japan.

The hedge is aimed at producers and manufacturers of cooling beverages, air conditioners, clothing and other summer goods, Yuji Ito, deputy general manager and ART group manager at the financial solutions department of Mitsui Sumitomo Insurance, told RiskNews.

The discomfort index was developed using past and future temperature and humidity data, and derives its name from the discomfort people feel when the index exceeds 80 in Japan, Ito added.

Counterparties can purchase day-count call options where they receive payment if the index is below 80 for a number of pre-specified days. Ito said Mitsui Sumitomo plans to develop other weather derivatives in the near term.