RMS launches new daily model for Climetrix

Risk Management Solutions (RMS), the California-based provider of products and services for the management of natural hazard risks, has released an advanced daily temperature simulation model that offers a new capability for valuing weather derivatives. This new model is available to RMS clients using Climetrix version 3.0, the latest release of the company's weather derivatives trading and risk management system.

The tool offers an alternative to the index modelling capabilities also available within the Climetrix system. While index models rely on an aggregate-level analysis of historical index values, RMS said the new daily simulation model analyses weather risk by simulating the day-by-day progression of temperatures over thousands of years of simulated weather.

The simulated time series should make it easier to value weather contracts that can prove difficult to analyse accurately with an index model. These include contracts based on short time periods, such as a week, or contracts based on event indexes that measure the number of times a specific temperature threshold is reached. The daily model also provides an alternative perspective for the analysis of contracts based on standard degree-day or average temperature indexes.

Bob Henderson, head of research at Element Re Capital Products, the Bermuda-based weather risk firm, said: "We believe daily modelling capabilities provide important insights into weather risk beyond what is possible with the index models that have traditionally been used in the market. As daily models evolve over time, we expect many market participants to move towards using such models as the primary basis for both trading and portfolio risk management.”

Since the initial release of Climetrix in July 2000, RMS claimed that more than 70% of active weather market participants have licensed the system or the underlying weather data.