Energy companies are by far the largest user of weather derivatives, but the market has struggled to attract companies from other industries to hedge their weather risk. Mooney believes that the inability to promote weather derivatives beyond energy companies stems from the low correlation that daily averages have for most other companies.
"Disneyland, for example, actually makes more money if it rains in the afternoon after a clear morning," claimed Mooney. "Once the theme park has the visitors inside, they make more money from their concession stands if there is rain in the afternoon." Mooney predicts that the creation of hourly-settled weather derivatives contracts will lower this basis risk for retail companies.
"Until that hourly information is out there, there won’t be any new end-user entrants, and the market won’t grow," said Mooney. "To expand the market we have to move away from contracts purely based on daily data."
Element Re, a unit of XL Capital, is the first customer for QuantWeather, and paid $50,000 to use its data.
The week on Risk.net, September 8-14, 2018Receive this by email