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Weather Risk Management Solutions
Commercial Risk Capital Markets (CRCM) was formed in 1999 to take
advantage of business opportunities arising out of the convergence
of insurance and capital markets. CRCM's primary focus is weather
risk management products and the trading of weather derivatives. Our
products give companies the unique ability to hedge against weather
risk, based on reliable indexes measuring variations in temperature,
rainfall, snowfall, wind speed, or a combination of variables.
CRCM's weather
products sometimes involve multiple triggers, often a combination
of traditionally insurable risks and market or financial exposures
such as interest rate or foreign exchange risk. In the case of weather
risk management, it has been beneficial to clients to combine temperature
risk with commodity price risk, precipitation, and currency exchange
fluctuations. Outside the weather market, CRCM has structured integrated
risk transactions that combine catastrophic event risk with interest
rate risk. CRCM maintains the capability of analysing and pricing
combined risks as its client needs prescribe.
CRCM has developed a core competency in valuing and hedging temperature
and precipitation risk. Our
staff includes professionals from the capital markets and (re)insurance
industries, as well as members of the scientific community. Collectively,
they have contributed to the design of proprietary computer modeling
systems specifically designed to manage weather risk.
Commercial Risk is a SCOR Group company domiciled In Bermuda. We have
been assigned ratings
of AA- by Standard & Poor's, and A+ by A.M. Best, and AA by Fitch
IBCA.
Weather Impacting Corporate Results
Today the market for weather risk management products is dominated
by the energy sector. However, corporate profits in a great many industries
are affected by fluctuations in weather, and demand is extending into
other sectors including agriculture, retail, trucking, leisure, airlines
and construction. Adverse weather conditions can no longer be blamed
for inadequate corporate performances, as shareholders and analysts
alike become aware of the existence of weather contracts as hedging
instruments. Our products allow corporations to mitigate risk exposure,
and to maintain consistent and manageable operating expenses, revenue
and profit margins.
After considering the business risks of prospective customers, and
the related accounting, regulatory and taxation constraints, CRCM
provides contract structures that best suit both the client's needs
and CRCM's ability to provide responsibly priced protection. In light
of the fact that weather risks are rarely the sole variable in a corporation's
risk profile, CRCM also focuses on developing integrated risk transfer
products. Capacity is offered in both insurance and derivative form.
Benefits of a Weather Risk Management Program
Any corporation whose products, services, operating expenses
or revenue flow is adversely affected by changes in weather conditions
can benefit from the security provided by a weather risk management
program.
Commercial Risk works closely with its clients to ensure their products
provide the most appropriate protection for the client's needs.
The challenge lies in ensuring that the covered risk is highly correlated
with the measurement index.
- A windmill operator providing wind-generated power would purchase
a seasonal option
based on a wind power index, to hedge against power production
shortfalls in periods of lower than average wind.
- Recreational facilities, such as amusement parks and ski resorts
would purchase a seasonal option based on a precipitation (rain
or snowfall) index, hedging against fluctuations in customer attendance
and revenues.
- Manufacturers of snow removal equipment, road salt, or recreational
snow-sports equipment would purchase a winter
season option based on a snowfall index, possibly combined
with a temperature index, to hedge reduced sales volume and the
cost of overstocking inventory.
- Manufacturers of water sports equipment and pleasure boats would
purchase a summer
season option based on a temperature index, to hedge against
reduced sales volume due to cooler than expected temperatures.
- Contractors and construction companies operating within strict
budget guidelines would purchase a seasonal option based on a
rainfall index, to hedge against project delays due to greater
than expected rainfall.
- A grocery store chain would purchase a winter option based on
a snowfall index, to hedge against delivery delay costs due to
greater than expected snowfall causing traffic delays or road
closures.
- A ski resort would purchase a winter season swap based on a
snowfall index, to hedge against snow production costs and avoid
an up front cost.
- A utility company would purchase a summer season option based
on a temperature index, to hedge revenue shortfalls associated
with below average seasonal temperatures.
- A contractor would purchase a wind power option based on a wind
power index, to hedge against production delays when work must
halt during periods of excessive wind.
- A citrus farmer would purchase a winter option based on temperature
and precipitation indices, to hedge against a reduction in ideal
crop growing days and the potential replacement cost of fruit
trees damaged by cold weather.
Basic Weather Contract Elements
- Geographic location, and applicable weightings if more than
one location is to be covered
- Exposure period
- Weather index to be used, or combination of weather indexes
and other client specific business indexes
- Data source for contract settlements (usually the National Weather
Service)
- Attachment Point (the point at payments under the coverage become
due)
- Notional amount (the dollar value per unit of risk)
- Contract Premium
- Contract Limit
For CRCM to structure transactions, it is imperative that clients
be able to identify the specific weather conditions that best reflect
the source of their business volatility, so the appropriate measurement
index or combination of indexes can be determined. Clients must also
be able to quantify the effect that changes in such indexes have on
corporate results. Once these details are established, and all of
the basic weather contract elements are identified and agreed by the
client and CRCM, documentation is drafted in a mutually agreed upon
format.
Associated links:
www.nws.noaa.gov
| www.wrma.org |
www.badc.rl.ac.uk
| www.artemis.bm
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