The Swiss reinsurer will use Longitude's Parimutuel Digital Call Auction (PDCA) technology in a bid to improve weather derivatives liquidity and transparency for market participants. Derivatives based on measures of temperature and precipitation, initially based on the US market, will be marketed towards utilities, reinsurers and insurers, said Swiss Re. “This initiative is consistent with our strategy to focus and leverage our risk capacity to create more overall liquidity in the global weather markets,” said Frank Caifa, associate director on Swiss Re's weather trading desk. “Longitude's technology and these new products, along with our new strategic initiative in trading, can have an enormous impact on the weather derivatives market.”
Caifa believes the PDCA technology, which establishes auctions for buyers and sellers of contracts, will generate narrower spreads than are currently available in the over-the-counter market. This is aimed at encouraging more firms to become involved in trading weather risk.
Longitude claimed PDCA allows financial intermediaries to provide derivatives and risk management products without assuming the market risks customarily associated with the facilitation of risk transfer.
“Swiss Re is a major force in risk transfer and the weather markets, and it is an ideal partner for the development of these new products,” said Andrew Lawrence, chief executive of Longitude.