The novel, one-sided financial market
structure described here appears to provide a
promising mechanism for hedging weather risk
in markets for events, such as hurricanes, for
which natural counterparties may be few or
nonexistent. Further information is available in the papers posted at: http://ams.confex.com/ams/pdfpapers/161731.pdf, and http://opim.wharton.upenn.edu/risk/library/WP2008-12-08_RM,MH,DW,KH_HuRLO.pdf
impact statement issue
Increasing coastal development coupled with recent, very active hurricane years have severely stressed the capacity of the U.S. insurance industry to absorb financial risks associated with hurricane damages. As a result, access to hurricane insurance has been progressively limited, costs to purchasers have increased, and financial protection against some consequences of hurricane strikes (e.g., business interruption) is effectively unavailable.
impact statement response
We have developed a novel financial market for mitigation of financial losses resulting from hurricane landfalls; in this market system, participants buy contracts from an exchange (www.weatherrisksolutions.com). Contracts pertain to hurricane landfalls at defined coastline segments from Texas to Maine, and prices vary through time in proportion to the probability that the next U.S. hurricane landfall will occur at a particular coastline segment. Risk is assessed through an adaptive control algorithm that responds to different levels of buying for the different coastline segments. Proceeds of these sales are collected into a common "mutualized risk" pool, and holders of contracts for the coastline segment eventually experiencing the landfall are paid from this pool in proportion to the number of contracts held. This market structure efficiently spreads hurricane risks across the entire Gulf and Atlantic coasts of the U.S. on the basis of the uncertainty regarding landfall location as quantified by probability assessments for the event.
impact statement summary
Increasing coastal development coupled with recent, very active hurricane years have severely stressed the capacity of the U.S. insurance industry to absorb financial risks associated with hurricane damages. A novel financial market for mitigation of financial losses resulting from hurricane landfalls has been developed to spread hurricane risks across the entire Gulf and Atlantic coasts of the U.S.
