Annual Market Rankings 2022

Weather markets continue to heat up

Climate-related adverse weather and macroeconomic conditions kept demand high for weather risk transfer products, this year's Environmental Finance Market Rankings winners tell Annabelle Palmer

While an increase in natural disaster events over the previous decades has spurred interest in hedging against weather risk, the greater demand for weather derivatives was this year heightened by macroeconomic factors, principally inflation, say market participants.

David WhiteheadDavid Whitehead, co-CEO of Speedwell Climate, says the climate risk industry, "is busier than it's ever been".

The firm – which has won the award for Best advisory/data service – Global for the seventh year in a row – rebranded from Speedwell Weather to Speedwell Climate in June.

"This is in light of the fact that the industry has gone beyond just talking about weather, and new climate variables being included in coverage," he told Environmental Finance.

"Coverage used to include temperature and precipitation hedging. Now it's those things plus river height, sea-level temperatures, carbon dioxide concentrations, hurricanes, and renewable power generation.

"Furthermore, if you look at the energy crisis right now – especially across Europe – coupled with the transition to renewable power, there are unique opportunities emerging in the climate risk market."

An increased awareness of severe weather linked to climate change, including stronger hurricanes and more intense droughts, has supported the trend for a wider range of sectors to seek weather risk products, he says.

Aside from the ever-increasing growth in demand from the renewables sector, Whitehead sees more demand emerging from the agriculture, tourism, and construction sectors – particularly in the US, Europe and Australia.

In emerging markets, Whitehead says one interesting area of demand is coming from supranationals - such as the World Bank - humanitarian groups and not-for-profits that are investigating the application of parametric solutions in those regions which are particularly exposed to natural disasters

"Parametric solutions are the hot topic right now," he says.

Typical buyers of parametric insurance – whereby a pre-arranged amount is paid in the event of a trigger event – tend to include investors, lenders, developers, and operators of renewable energy plants, the agricultural sector, and governments who are developing disaster risk financing schemes.

However, as more people learn about the application of parametric solutions, Whitehead says he is seeing a trend towards "more mission-specific indices".

Richard ZhangIn Asia, WTW has seen an increase in parametric insurance demand in 2022 compared with 2021, says Richard Zhang, head of alternative risk transfer solutions for Asia at WTW. The firm won Best broker – Asia for the second year in a row.

"The majority of these [solutions] were for the agriculture and aquaculture industry, with the rest covering natural catastrophe risks and renewable energy projects in the region," he says.

Zhang has also observed a strong interest in the application of parametric insurance capacity in cases where traditional insurance capacity is tight or unavailable due to the risk profile of an event.

In terms of geographies, Zhang sees the strongest demand for weather-risk products in Australia, New Zealand, China, Thailand, Japan, Taiwan and the Philippines.

"This is mainly reflective of the natural disasters and severe weather risk patterns in those territories," he says.

In the US, Paul Schultz, chairman and CEO of Aon Securities, which won Best dealer/structured product seller – North America, says that the macroeconomic events of the last 12 months have had broader implications for risk transfer capital.

"Inflation created growth in underlying insured exposures, creating a larger demand for risk transfer capital," he says.

This pressure was felt globally as interest rate raises in several economies directly impacted the cost of capital.

As the year unfolded, adverse weather events, such as Hurricane Ian in the US, further amplified demand for weather risk protection, he says.

In Australia, Ian Tannebring, partner at CQ Energy, says the "demand for hedging remains consistent with previous years, albeit in a difficult energy market due to elevated power and gas prices and market volatility".

As with other regions, the trend has driven up the cost of hedging products for weather risk in Australia.

Tannebring says the energy sector continues to see the greatest demand, followed by agriculture.

"There is also growing interest from those in the water sector who are looking to manage contractual obligations or exposures," adds Patrick Bourke, a broker at Risk Solutions International.

CQ Energy, in partnership with Risk Solutions International, delivers weather risk management solutions. The duo won Best broker – Australia this year.

Bourke expects demand for "a range of products to manage price volatility in the energy markets to continue, with products to manage the intermittency of wind and solar continuing to develop".

Looking ahead, market participants expect the growth in environmental, social and governance (ESG) investment mandates to shape the market.

While ESG-related regulation is largely being led by European regulation, ESG trends are being felt in insurance-linked securities (ILS) markets globally, says Schultz at Aon.

"Because we are early in the journey, we are lacking consensus on some of the key issues, such as ESG scorecards. But it is clear that we will continue to invest in ESG frameworks, and it will be an important consideration for both issuers and investors going forward."

Zhang expects to see new weather risk solutions develop as the availability of risk data improves, both for standard parametric offerings, as well as for new solutions that could cover pandemics and volatility in commodity prices.

As Schultz at Aon says: "We like to say that we are only bound by our ability to innovate."