Hedging Climate Risk: Weather Derivatives vs Parametric Insurance
Need for Weather Products
More than USD 17.4 bn notional of global weather derivatives were traded in 2024 and the size of the market for climate change related physical risk hedges and protection is anticipated to grow in line with rising climate change, compound events that create larger damage, and similar phenomena described by the Intergovernmental Panel On Climate Change’s (IPCC’s) 6th Assessment Report.
The expansion of electronic trading platforms and improved regulatory frameworks have facilitated the trading of these derivatives through better market accessibility, liquidity, and transparency.
With the increased sophistication of weather modelling, availability of satellite data, and computer resources, there is scope to create tailor-made financial products matching companies’ specific risk profiles, which could further increase the size of the market.
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