Value of weather risk management contracts soars (June 28, 2006)

The notional value of weather risk management contracts increased nearly five-fold over the past year from US$9.7 billion in April 2005 to US$45.2 billion as of March 2006.The Weather Risk Management Association (WRMA), an international trade organization of the weather risk management industry, compiled the figures for its annual survey of the industry. “The explosive growth we are experiencing is a result of companies realizing the importance of the weather market, as well as its interdependence with the commodity markets particularly energy, and the ability to hedge commodity price risk in the weather market,” WRMA president Brian O’Hearne said.O’Hearne has been the managing director of Swiss Re’s environmental and commodity markets in North America for the past two years. In that time, the weather risk management market has grown from US$4 billion to US$45 billion. “The efforts of WRMA and its members in market education, regulatory framework and legal documentation around the world have laid the foundation for this exponential growth, by providing greater transparency, liquidity and creditworthiness to clients,” O’Hearne added. The stunning success of weather contracts listed on the Chicago Mercantile Exchange (CME), which more than quadrupled during the survey period, also contributed to the growth, WRMA says. “Trading on the CME has grown with tremendous acceleration over the last two years, with volumes rising from 4,400 contracts traded in 2002, to more than 1 million contracts traded this survey ending March 2006.”Gearid Lane, procurement director of Centrica Energy and incoming president of WRMA, said: “We are really pleased with the excellent growth in trading volumes. These results demonstrate that the market is reaching its full potential.”In the coming years, this market will enable businesses to hedge more and more of the trillions of dollars of weather exposure in the world’s economies.”