I-Wex backs hourly data to boost weather market

Most weather derivatives contracts are settled by heating degree days or cooling degree days at present. Mooney believes that offering weather derivatives that can be settled on specific hourly measurements, rather than daily averages, will extend the applicability for weather derivatives to match business risks for a wider number of industries.

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.