Over the past few years, Sompo Global Weather (SGW), a provider of weather-driven derivatives products, has noticed a marked change in the way customers are managing weather risk, it says. While many still focus on purchasing single products that span an entire risk season, there is a growing trend for purchasing multiple products – often smaller in size – throughout a season, they say.
This trend was particularly pronounced in 2017 and led SGW to launch a new platform to cater for it. Weather Connect is a proprietary online structuring and analytics platform that provides clients real-time, executable pricing for both single and multiple transactions.
“Weather Connect … enables us to take our service to the next level,” says Martin Malinow, president at SGW. While the products on the platform have not changed – they are mainly single-trigger weather structures – the distribution and administration is very different, he stresses.
“We view this platform as an opportunity to provide a state-of-the-art service that not only differentiates SGW from its current competition, but from itself a few years back. We have gone from being solely in the product business to also being in the [hedge] programme business – an evolution we believe is consistent with where our market is heading,” he says.
Weather Connect helps clients structure protection against a wide array of weather events including temperature, precipitation and snowfall. As clients build their structure on the platform, the analytics package builds a record of it and makes this available along with other valuable analytics, in a downloadable PDF that is sent to the client.
The availability of big data is one of the major drivers behind firms taking a more granular approach to weather hedging, says Malinow. Without it, firms can only work with an aggregated view of risk.
We view this platform as an opportunity to provide a state-of-the-art service that not only differentiates SGW from its current competition, but from itself a few years back
Martin Malinow, Sompo Global Weather
“Whether an agriculture merchant or an energy utility, you are effectively aggregating the weather risk that’s associated with each individual customer, be it a farmer or a rate payer,” says Malinow. “The company winds up holding a lot of that risk, so they face challenges in internal risk management and transfer pricing, such as whether they are pricing the weather risk embedded in their product correctly.”
But with big data and analytics, corporations are now beginning to be better able to drill down into the weather risk of individual customers and then aggregate groups of customers according to the type and level of weather risk they pose.
“Now we are in a much different situation where we can help our client drill down into literally tens of thousands of their clients and aggregate those up at the right price, with individual invoicing where appropriate,” says Malinow.
Weather Connect provides a way for clients to administer that programme, making sure risk is priced and settled correctly.
Building infrastructure with instantaneous pricing is a considerable investment in technology. The firm has an eight-person team, with two working in operations and five involved in modelling, underwriting and pricing.
The modelling/analytics team uses the Mathworks vendor system Matlab, which allows highly computer-intensive mathematical models to be expressed on desktop software. The firm used Matlab to express its business routines and the firm’s entire analytics library. However, that had to be represented in a way that would allow customers to engage with the firm’s models when buying and building products or programmes. Sompo took the representations of its modelling from Matlab and built a calculation engine in a useable website, developing alongside that the necessary navigation and an online structuring analytics platform.
Moving such complex mathematical modelling from one system into an online user interface was not straightforward. The latter element required the firm to develop a completely different skill set, by bringing new developers to the team who take the code from the internal analytics team, and re-write it into the appropriate code to represent it online.
“We invested in internal resources to get our platform up and running and, in the first year, we have seen a significant return on that investment,” Malinow says. “We have already closed and facilitated business directly off Weather Connect, resulting in increased revenues with scaling potential that is orders of magnitude higher than where we are currently.”
The success has convinced Sompo’s leadership that they need to scale up in this direction, in order to support greater digital capabilities for the future.
“The raw material at SGW has always been our people and our focus on white-glove customer service,” Malinow says. “Since our team eventually leaves in the elevator every night, we wanted to provide our clients with the ability to structure and price transactions on a 24/7 global basis.”