Weather risk market remains buoyant, claims Clemmons

Lynda Clemmons, president of Connecticut-based weather risk company Element Re and president of the Weather Risk Management Association (WRMA), said equity analysts, rating agencies and corporate board directors are starting to pay more attention to the benefits provided by weather hedging. As a result, corporate end-users are increasingly seeking to hedge their profits against fluctuations in seasonal weather.

Since the start of the year, both France's BNP Paribas and Italy's IntesaBCI have pulled back from the weather derivatives market. Failed energy company, Enron, was the leading pioneer in weather risk trading with an estimated 40% market share prior to its demise. Missouri-based energy trader Aquila picked up much of Enron’s weather risk market share but in August exited the business following a decision to cease all trading operations due to credit concerns.

Ongoing credit concerns at major US energy companies have done little to help build the embryonic market, but this is unlikely to dampen demand for weather derivatives, Clemmons claimed. “End-users are not going to be detracted from the market, but instead will look closely to ascertain counterparty credit risk when entering into transactions.”

This could provide an opportunity for banks, and other financial institutions with a strong credit rating, to pick up business or establish a trading presence, said Tamas Haiman, head of European sales at French bank Société Générale.

But Ross McIntyre, director of weather risk for Deutsche Bank in London, said although interest in weather hedging in Europe was growing, few deals are ever closed since most require board-level approval. He added that around 95% of Deutsche's clients that inquire about weather derivatives are from industries outside the energy sector - the traditional user of weather hedges. For example, Deutsche sold a critical-day, precipitation-linked contract to an organiser of Munich’s annual beer drinking festival, Octoberfest this year.

McIntrye said it was vital for WRMA to take a lead in developing the Japanese and Australian weather markets.