Weather risk refers to exposure to changes in temperature, precipitation, volume of wind or streamflow, or other natural variables that can impact earnings of corporations and individuals. As distinct from catastrophe risk (large natural hazard impacts such as earthquake or hurricane), weather risk impacts a wide range of businesses around the world every day. Risk transfer takes place via derivative or insurance contracts that pay on an indexed basis: for example, $1mm for each day over 100F or each inch of rain on a weekend day. The approximate amount of notional exposure that trades in the weather market each year is less than $10B – though it is much smaller than the catastrophe risk market at present, we believe it has real growth potential. There is an exchange-traded futures market on the CME which has a large notional volume of daily trading for specific cities, as well as a larger OTC risk transfer market. We have executed weather trades with underlying risk across North America and Europe as well as in Australia and Japan.
Nephila manages a dedicated weather risk fund that was launched in January 2005. Investors in Nephila’s catastrophe risk funds can consider investing in Nimbus.