Weather House of the Year: Swiss Re

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Weather derivatives are still viewed as obscure and strange by some market observers, but they are now part of the standard risk management toolkit for energy firms whose fortunes can rise or fall in line with weather conditions. And when such firms need complex, bespoke transactions to manage their weather risk, they often turn to Swiss Re. The Zürich-based company wins Energy Risk’s Weather House of the Year award for its continued efforts to provide clients with innovative solutions, as well as its concerted push to expand beyond established markets in Europe and the US.

“We are unique in that no-one else in the market can offer utility-sized deals and sophisticated hedges that involve both temperature and a commodity price,” says Stuart Brown, London-based head of origination for Europe and Asia at Swiss Re Corporate Solutions. Swiss Re offers these services against power and gas prices in the US and UK, gas prices in Europe and power prices in Australia. In each of these markets, Swiss Re counts many major utilities as clients.

Admittedly, there are other dealers that offer such products – called quanto structures – in which the payout depends on both a weather variable, such as an index of heating degree days, and the commodity price. But market participants say Swiss Re is the only dealer that can execute such transactions on a large scale, with the ability to underwrite the entire transaction by itself, rather than teaming up with other firms to distribute the risk.

Clients also praise Swiss Re for its speed. “When we call our counterparties, we want a very fast turnaround and Swiss Re responds to us in a timely manner compared to others,” says a senior trader at a US-based utility.

A recent theme for Swiss Re has been expanding its client base outside the US and Europe. The firm executed its first rainfall hedging-based transaction in China in 2011, and it has hired a salesperson in Zürich to concentrate on the Chinese market; other Chinese deals are in the pipeline, says Brown. Swiss Re is also looking to establish a Sydney office to accommodate the rapidly growing Australian market.

No-one else in the market can offer utility-sized [quanto] hedges

“Swiss Re are market leaders in this space, and they’ve been pretty competitive and flexible in terms of being able to model multiple iterations on the products and come to meet our pricing,” says Simon Rodgers, group manager of trading and strategy at Sydney-based utility Origin Energy.

Rodgers notes the Australian power market can be highly volatile, recalling a recent heat wave that caused power prices to surge from A$50 ($49.50) per megawatt-hour (MWh) to nearly A$13,000/MWh ($12,859/MWh). “That’s a lot of price and volume risk,” he says. “We have worked with Swiss Re to develop products that manage price and volume risk around our retail portfolio.”

Swiss Re has also formed an alliance with the International Finance Corporation (IFC), the Washington, DC-based private-sector development arm of the World Bank, to offer weather risk management tools for farmers in developing markets, who often struggle to obtain conventional insurance. “Those parts of the world have been underserved with crop insurance, and we’ve partnered with the IFC to develop index-based products for African and other developing countries,” says Christina Ulardic, Swiss Re’s head of market development for Africa, who is based in Switzerland.

Similarly, in 2012, Swiss Re established a partnership with The Climate Corporation, a San Francisco-based company that provides index-based weather hedges to US farms that have traditionally relied on the US government’s crop insurance programme. By using such hedges, the farms can receive payouts linked to adverse weather events, such as drought or extreme temperatures, without going through a time-consuming claims process.

Such efforts are part of Swiss Re’s attempts to popularise weather hedging in industries besides the utility sector. In another example, Brown cites a snowfall hedge that Swiss Re designed for a company that clears railroad tracks in Europe. “If there are six or seven snowstorms in a given year, that’s bad news for them,” he says. “So we’ll write hedges for that.”

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