Interesting to see that a new hurricane futures and options contracts began trading today at the Chicago Mercantile Exchange. While previous efforts to create some sort of exchange-traded catastrophe risk product have fallen short, obviously folks at the Merc are optimistic that the time is now right for such a product to take hold.
Notably, the state of risk modelling has advanced considerably from where it was in the mid-90s when the Chicago Board of Trade tried to make a go of a catastrophe options contract. And there’s a greater comfort level today with using capital markets tools to address catastrophe risk.
Of course 2005’s hurricane losses have also played a considerable part in encouraging the exploration of new methods to address cat exposures, and bringing new players into the market.
The Chicago Merc’s contracts cover five defined U.S. regions: the Gulf Coast, Florida, the Southern Atlantic Coast, the Northern Atlantic and the Eastern U.S. The contracts are based on Carvill Group’s Carvill Hurricane Index, which uses data from the National Hurricane Center of the National Weather Service to calculate the potential for storm damage based on maximum wind velocity and storm radius.
In addition to insurers, the CME expects such entities as energy companies, pension funds, state governments and utility companies to look to the new contracts to hedge hurricane exposures.