European derivatives exchange Eurex will this week launch contracts for hurricane futures on wind damage for the risk period of January to December 2010.
Eurex, jointly operated by Deutsche Boerse (DB1Gn.DE) and SIX Swiss Exchange, was the first European exchange to offer hurricane futures in June 2009 [ID:nLG71891], but as yet has not traded any futures because of a quiet US hurricane season.
Hurricane futures will allow asset managers, hedge funds, banks and insurance companies to trade or hedge against insured losses from storms.
Despite a depressed market, Eurex's new contracts have been launched to complement traditional Insurance Linked Securities' (ILS) and Industry Loss Warranties (ILW), which will facilitate hedging and trading of catastrophe risk.
Steve Emmerson, a broker at Tullett Prebon, said the arrival of Eurex Hurricane Futures has prompted many investors to investigate and revisit the advantages that futures bring.
"Many investors in the ILS sector are considering their strategies closely, be it to hedge against Cat Bond positions, put surplus funds to work, or take advantage of trading profits," he said.
Insurance futures exchange IFEX recorded a record month in notional transactions in the run up to the hurricane season this year, with $41.1 million in April 2009. This was higher than IFEX's previous peak of $40 million in December 2008, after the costly 2008 disasters such as Hurricanes Ike and Gustav.
The volumes during August through to October this year slowed down as it became apparent 2009 was a lighter hurricane season than the previous year. There has been no activity on IFEX this month as the hurricane season came to a close.
Eurex will offer the futures for three regions -- the United States nationwide, the Gulf Coast states and Florida -- with different trigger levels based on estimates for insured losses for each region.
The USA trigger levels range from $10 - $50 billion, the Gulf Coast States from $10 - 20 billion and the State of Florida range from $30 - $50 billion. The contracts will settle at the given amounts if the damage estimate meets of excess the trigger level.
Tullett said activity levels in hurricane futures have disappointed this year, but moving into 2010 and trading volume will continue to develop, especially as more counter parties come into the space and true market pricing is established.
"Once liquidity and more activity is created, the market will open up beyond just those with specific insurance interests because hurricane futures will allow all interested parties, for example Energy companies, to hedge or simply speculate against US Wind risk," he added.
Eurex said it hopes to attract new players to the market - such as specialist ILS funds, reinsurance companies and multi-strategy hedge funds. Hurricane losses are uncorrelated to financial markets, giving investors an opportunity to diversify.
"We attempt to widen the list of participants in this market to those who are traditionally confined to financial markets. As a result, this should in due time create extra capacity, transparency and liquidity in the catastrophe insurance market," said Christian Baum, Director of Product Strategy at Eurex.