Hurricanes as alternative investments
Aug 13th, 2009 | Filed under: Today's PostBy: Ranjan Bhaduri, CAIA, AllAboutAlpha.com Editorial Board (with Hannah Wendling, AlphaMetrix)
The 2005 hurricane season stands out as one of the most brutal in recent memory in the United States. Many will remember it as the only year in recent memory where we ran out of names (one for each letter of the alphabet) and had to dip into the Greek letters (Hurricanes “Alpha” “Beta” “Gamma” etc.)
That season caused an estimated $124 billion in damage in the US, $45.7 billion of which was insured. Hurricane Katrina alone saw the loss of many lives as well as $100 billion in damage, $34 billion of which was insured. That hurricane season led to customer claims far beyond the capacity of the U.S. insurance industry. Four years later, the insurance industry is still starved for capital and leading insurers in states like Florida are phasing out their policies altogether. With this year’s hurricane season getting under way, insurance rates are rising with no end in sight over the next five years.
Hurricanes now reaching Chicago
One possible solution to this growing insurance crisis may lie in derivatives. The Chicago Mercantile Exchange (CME) has developed a way to offset hurricane-related risk by transferring risk to the capital markets: As of last winter, it is now possible to trade contracts for hurricane futures and options. Having these contracts on a world-class exchange like the CME makes for a viable solution. The market participants include insurance and reinsurance firms, CTAs, hedge funds, energy companies, state governments, and utility companies. More…
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