Transcripts

Weather & Risk Management

PAUL KANGAS: This is the first week of hurricane season. That means insurance companies are keeping a wary eye on the tropics. But it's a different story for firms involved with weather risk management. Energy companies and re-insurers have hedged against the weather for nearly a decade. But as Jeff Yastine reports, new online exchanges are now letting small businesses do the same thing.

JEFF YASTINE, NIGHTLY BUSINESS REPORT CORRESPONDENT: This week, priceline.com announced an unusual deal. The company will refund money to buyers of its vacation packages if it rains more than a half an inch a day during half or more of the holiday. How's that possible, by using financial products that hedge against extremes in heat, cold, wind and rain. They're called weather derivatives. Think of them as futures contracts which pay off under specific weather conditions. It could be a powerful hurricane hitting the coast or a drought in the nation's corn belt. There are weather contracts that cover all possibilities. Hedge fund manager David Oliveira invests in weatherbill.com, a company that packages and sells weather derivative contracts.

DAVID OLIVEIRA, CO-PORTFOLIO MGR., NEPHILA CAPITAL: They can choose a term for which they would like to buy weather coverage. They can choose the trigger on which they want that coverage. So is it a half an inch of rainfall. Is it three days of maximum temperature above 85 degrees? YASTINE: Weatherbill and competitor stormexchange.com are new entrants in the emerging field of weather risk management. Martin Malinow, president of the Weather Risk Management Association, which is meeting in Miami Beach this week, says companies now recognize weather as a financial risk, just like rising commodity prices or interest rates.

MARTIN MALINOW, CEO, GALILEO WEATHER RISK MGMT.: Twenty years ago, we saw the advent of interest rate hedging and interest rate derivatives and equity derivatives, commodity derivatives. And a natural offshoot of that would be to look for other risks in the corporate structure that are embedded that cause variations in earnings and cause people headaches if you are a financial manager. And it makes sense that the next generation of those products would deal with other variables like weather and insurance risks.

YASTINE: There are other weather derivative products, like the hurricane futures contract at the Chicago Merc. They work for large energy companies worried about storm damage. But John Cavanaugh, CEO of Carvill, an insurance intermediary, says even small businesses could use them to prepare for catastrophic weather.

JOHN CAVANAGH, CEO, CARVILL REINSURANCE INTERMEDIARY: I think a lot of retail interest will be developed -- like, for example, hotels on the coast, anybody with coastal exposure that has an impact on their business from hurricane risk.

YASTINE: Trading volumes of weather derivatives rose by more than 30 percent in the past year and experts see that number rising as more companies look for ways to hedge the weather. Jeff Yastine, NIGHTLY BUSINESS REPORT, Miami.