BNL plans weather desk for Italy

Because of the recent increase in the number of corporate defaults, coupled with a downturn in the global equity markets, BNL predicts that institutional investors looking for new products will be receptive to structured weather-linked investments.

James Dolby, a London-based structured products manager for BNL, told RiskNews that the firm does not intend to trade speculatively. “Instead, BNL will act as a margin-taking weather risk originator, placing its risk with insurance companies, through alternative risk transfer, or with energy companies,” said Dolby. French bank BNP Paribas, which traded weather derivatives speculatively, became one of the first casualties of the weather risk market when it ceased trading in January.

Although Italy still lags behind Scandinavia, the UK and Germany when it comes to energy deregulation, Dolby said Italian energy firms are interested in using weather derivatives. Other sectors that BNL plans to target include the agricultural community, such as wine and olive oil producers, ski resorts which have suffered from a recent lack of snowfall, and clothing manufacturers. Dolby added that BNL clients may choose to tie weather derivatives with interest rate or foreign exchange deals or other corporate hedging strategies.

But BNL is faced with some problems. “The availability and quality of Italian weather data, which is central to structuring weather derivatives, has so far held back any activity in the Italian weather market,” said Dolby. BNL has yet to decide whether to opt for the meteorological data provided by the official Italian weather service, or the data provided by Italian military weather stations. But it won’t be analysing the data itself. Instead, BNL said it will buy cleaned data from third-party data providers, such as California-based Risk Management Solutions.

Although Dolby said there is a lot of untapped potential in the Italian market, BNL will face competition. Italian bank IntesaBCI has been globally active in the weather derivatives market for the last year, although it is unclear whether it has yet closed any deals in Italy. “As far as I’m concerned the more participants in the weather risk market, the better,” said Richard Turin, IntesaBCI’s New York-based head of structured products. “If more banks get involved, then more corporates will become aware of the benefits weather hedging can provide.”

The most recent entrant to the weather risk market is South Africa’s Gensec Bank. Marsh & McLennan Enterprise Risk, a sister company of New York-based insurance broker Marsh, is also in the process of establishing a weather derivatives desk aimed at enticing corporate end-users into hedging against revenue-threatening weather variations.