Weather derivatives trading increases 35% year on year

Trading volumes of weather derivatives have increased 35% year on year, according to a survey by the Weather Risk Management Association (WRMA).

The annual survey, which covers April 1 through March 31 of the following year to capture the complete winter and summer seasons, revealed the total number of futures and over-the-counter derivatives contracts traded totalled 985,000 for 2007-2008, compared with 730,000 in 2006-2007. Notional value of the contracts rose 76% to $32 billion in 2007-2008, from $19 billion in 2006-2007.

WRMA partly attributes this growth to a wider variety of market participants, in terms of geography and diversity, using weather derivatives. It said that in India, Latin America and South-east Asia companies are increasingly using weather derivatives to offset weather risks to agriculture and other sectors. Several Indian companies have joined WRMA and the association is setting up a regional committee to serve those new members.

WMRA’s latest figures follow predictions from the US National Oceanic and Atmospheric Administration (NOAA) that this year could see above average levels of hurricanes, presenting a source of catastrophe risk.

On May 22, NOAA’s Climate Prediction Center said it expects this year to have a 60% to 70% chance of 12 to 16 named storms, including six to nine hurricanes and two to five major hurricanes. An average season has 11 named storms, including six hurricanes for which two reach major status.

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