Friday, February 10, 2017

"Exchange traded weather derivatives still struggling to gain traction"

From Artemis:
Exchange traded weather derivatives are still struggling to make headway across Europe, as demand for bourses’ contracts remains limited, suggesting a need for further sector education and innovation.

Speaking at a conference as part of Germany’s E-World trade fair, weather risk transfer experts discussed the persistent challenges and struggles facing a successful European energy market for weather derivatives.

Europe, as with the wider world, experiences seasonal changes and a variety of weather events across numerous regions, including wind events, storms, earthquakes, flooding, and so on. But despite the dynamics of the European energy market, which continues to adapt to renewable energy advances, industry experts explained that bourses such as Nasdaq and EEX have seen limited demand for solutions.

Speaking at the conference Jens Boening, Head of Weather Derivatives at EDF Trading in Britain, said, “most European utilities consider weather risk management as strategically important,” adding that “the weather derivative market is still in its infancy.”

To date, explained industry experts in an article published by Reuters today, weather derivatives are placed bilaterally between buyers (utility companies) and sellers (insurers and reinsurers), with reinsurance companies and large ILS funds dominating the sell side owing to their ability to diversify energy risk across their portfolios and structure complex, customised deals.

In addition, stiff competition and mounting sector headwinds has resulted in an availability of cheap and increasingly efficient reinsurance capacity.

At the same time, the education of potential corporate buyers of exchange traded weather derivatives has perhaps been lacking, and exchange traded solutions might do better, in some instances, were they sold to company Chief Financial Officers (CFOs) as a form of contingent capital, as opposed to targeting insurance buyers.

The Reuters article notes a lack of interest for wind power contracts launched in 2015 on bourses Nasdaq and EEX, an area Artemis discussed recently as being a billion-dollar opportunity for insurers, reinsurers, and insurance-linked securities (ILS) players.

Speaking to Reuters, Peter Reitz, Chief Executive Officer (CEO) of EEX said that he wasn’t too concerned by slow penetration rates of the bourse’s German wind power derivative launched recently. Saying that while it’s yet to witness any trades, “we just have to be patient.”...MORE

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“If you’ve been in the game 30 minutes and you don’t know who the patsy is, you’re the patsy.”
-Poker proverb used by Warren Buffet in his 1987 Letter to Shareholders

As an old insurance bigwig (not Mr. B) once said to me, "These things are for writing, not buying"

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