What is a weather derivative?
A weather derivative or weather contract is a sophisticated over-the-counter financial product designed to accommodate a large variety of market participants who wish to gain financial exposure to the weather. With a weather derivative you can professionally protect your business against adverse weather conditions. A derivative can be customised to fit your unique risk profile and to suit your budget.
The contract is linked to weather conditions measured at a specific weather station or satellite grid, over a specific period. If the defined weather conditions are met, a pre-defined payout is triggered automatically. Unlike traditional insurance, no claim needs to be filed.
You specify the climatic events that you need cover against during a specific period, as well as the payout you want to receive should the events occur. A once-off premium is calculated based on the specifications of your desired derivative. The premium is the only required payment and thus you will not be liable to make any other payments besides the premium. Payouts are received promptly and automatically if your defined weather condition occurs. Should the period lapse without the specified event occurring, your derivative expires and you simply lose your premium.