B. Historical Measurements and Data 1. Accuracy and consistency of data measurements 2. Change in instrumentation 3. Change in location
II. Financial Products Available A. Derivative Products 1. Temperature Based-HDD or CDD contracts 2. Precipitation Based-Snow or Rain 3. Combination Structures-Temp and Precip
B. Insurance Products 1. Simple 2. Complex 3. Flexible to meet specific customer requirements
Weather forecasting can have a tremendous impact on companies looking to take financial risk based solely on the weather. Accurate long-term forecasts will enable companies to establish favorable positions into the future. Medium and short-term forecasts will allow existing positions to be managed as the winter or summer season unfolds.
Since the basis of pricing financial products based solely upon the weather rests on the accuracy of the data, the accuracy of the recordings is critical. Both current and historical measuring devices must be reviewed for changes in location and or actual equipment used. Slight changes in equipment or location can have a dramatic impact on future recorded temperature or precipitation and impose significant financial consequences to contracts entered into by either party.
Derivative Products can be drafted based upon Heating Degree Days, Cooling Degree Days, Average Temperature, and or Maximum/Minimum Temperature for a given period desired. Precipitation derivatives can be designed based upon either a maximum or minimum amount of snowfall or rainfall. A derivative can also be designed to incorporate a combination of both a temperature element and a precipitation element.
Insurance Products can be designed to be simple or complex - once again based upon the weather. In its simplest form, a buyer pays a premium for the right to collect if certain weather events cause the buyer to suffer a financial loss. A more complex policy can be structured where the buyer not only pays an initial premium for protection, but also under certain weather conditions pays additional premiums if the weather is extremely favorable to its business. In addition, the structure of an insurance policy allows for great flexibility in crafting a solution that exactly meets clients’ needs. Temperature and precipitation triggers can be specifically customized to mirror serious weather exposures that will negatively impact a company’s revenues and or cash flows.
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