Weather derivatives evolve as risk mitigation device

Source: BI

Weather derivatives, originated in the late 1990s by recently deregulated U.S. energy companies looking to mitigate revenue lost to adverse temperatures, have evolved to become a multibillion-dollar worldwide business.

Today, observers and proponents say, the weather derivative market serves numerous business sectors and regions, as well as a host of risks.

Those advances, they note, are the primary reason the number of weather derivative contracts written globally last year reached more than 1.4 million through March, a record for the market, according to the Washington-based Weather Risk Management Assn.

The total value of those contracts rose as high as $45.24 billion in 2006, the year after Hurricane Katrina, and totaled $11.82 billion last year, according to the association.

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