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Weathering the Odds

A new electronic weather risk exchange is opening up the possibility of using weather derivatives to more industries

By Duncan Wood | Updated on June 01, 2007

It’s been known for decades that a wide swathe of U.S. commerce is exposed to the weather–the Department of Commerce says a third of GDP is produced by weather-sensitive industries. But for many of these companies, there has been precious little that they can do about Mother Nature. Now, help may be at hand from the Storm Exchange, an electronic weather risk exchange launched in April.

Exchange-traded weather derivatives–contracts that pay out when the sun fails to shine or too much rain falls–have typically catered to energy industry needs, says Storm Exchange president David Riker. The only alternative has been expensively tailored contracts arranged on a bilateral basis by the big investment banks. Storm Exchange aims to make derivatives more accessible to a wider range of companies. “We’re looking to fill the gap in the middle–to create standards by which industries can measure the financial impact of weather conditions, create transparency about that impact and produce industry-specific solutions. That just hasn’t existed in the past,” Riker says.

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