What are weather derivatives?
Weather derivatives are bilateral futures contracts that are accounted for based on atmospheric conditions, rain or wind speed. These instruments are used the most often in managing a non-catastrophic weather risk, but they are used more and more often for investment purposes as an attractive instrument to diversify the portfolio.
What is non-catastrophic weather risk?
The concept of non-catastrophic weather risk is used to describe a financial exposure of the company to such weather phenomena like heat, cold, rainfall, snowfall or wind. Other definition describes this risk as a financial gain or loss resulting from changeability of daily weather conditions. In the light of the rules of risk management in the company, it seems much more accurate to modify the latter so that weather risk of this character is identified with a potential financial loss only, which can affect a company as a result of unfavorable weather conditions.
In which companies does non-catastrophic weather risk occur?
The sectors the most exposed to weather risk include:
1. Energy production
3. Food and brewery industry
4. Building industry
5. Entertainment and tourist industry
7. Municipal police services
How, by means of weather derivatives, can we limit this risk?
A company exposed to unfavorable weather conditions which knows the parameters of this risk, can make a derivative transaction (it can be a forward, futures, swap or option contract) by means of which it will transfer the unwanted risk to the capital market. Then, if bad weather conditions occur, which will be mirrored in the value of a proper index, the company will receive a financial compensation.
How can we correctly determine the parameters of weather risk in the company?
Consus sp. z o.o. cooperates with the Institute of Economics and Management of the Szczecin University of Technology which specializes in performing comprehensive identification and measurement evaluations of the company’s exposure to non-catastrophic weather risk. Such analysis usually also includes, apart from risk parameters, proposed variants of hedging structure, assessment of the expected effectiveness of these structures as well as their valuation. In Poland at present only the Institute of Economics and Management of the Szczecin University of Technology performs these types of studies according to the procedures of Western insurers.
Who sells weather derivatives in Poland?
In Poland, weather derivatives are offered only by foreign insurance companies (often cooperating with Polish brokers) which operate in the European Union on the OTC market. Consus sp. z o.o. conducts transactions with weather derivatives and CO2 emission allowances in Poland and in the European Union. Consus sp. z o.o. cooperates with an international insurance company Galileo Weather Risk Management Ltd, which is a leader in selling derivatives and weather insurance in Europe (around 80% of wea