Weather patterns around the globe seem to be in flux so far this year. Severe winters in Europe and the U.S., extremely dry weather in parts of Asia, the coldest Siberian winter in many years and now reports of permafrost melt on the steppes. A lot of this is due to the El Nino weather phenomenon it is believed.

Last year’s Atlantic hurricane season was particularly benign. No major storms caused damage in the U.S. and there were less storms overall than usual. This year we may be due for a more severe season according to AccuWeather.com.

Their chief long range meteorologist is predicting 15 storms in total, 7 of which will make landfall with 5 as hurricanes. He predicts that 2 or 3 of those landfalling storms will be major. More on the forecast from AccuWeather.com here.

Sources in India have confirmed that exchanges and trading firms are still waiting on the Indian parliament to amend the Forward Contracts Regulation Act in order that new asset classes such as weather futures and index-linked weather contracts can be introduced to markets there. This is seen as essential for India to be seen as a world class financial centre.

Not only does India need the diversity in its financial markets but it also needs to the ability to trade weather contracts based on measurements at weather stations within the country. Weather insurance and micro-insurance have been widely accepted within India and the obvious next step is to enable companies there to access financial markets to hedge and trade their weather risks.

Our sources tell us that it will happen but Indian bureaucracy and red tape means these things take time. We’ll keep you up to date on events in India as the markets there progress and come to fruition.

Insurance Australia Group (IAG) have reported that thanks to severe weather in the Victoria region of Australia between the 6th and 9th of March it has blown its budget for disaster costs for the second half of the year. They received over 24,000 claims for the event and exceeded their maximum event retention of $135m under their reinsurance cover. Suncorp Metway have also reported large losses but haven’t said whether it will affect their bottom line at the end of the year.

Read the report from IAG here.

Events like this negatively impact businesses bottom line. Usually on Artemis we’re discussing industries who don’t have sufficient cover but they’re normally outside of the insurance world. For insurers to be impacted in such a way it takes large events which don’t happen at all frequently so ensuring the cover in place is difficult. However, a blend of reinsurance and other ART or weather risk management techniques could at least have provided more of a buffer to IAG in this instance. A lesson to all that no-one is immune from the impact of unexpected severe weather.

Insurers have paid out over £650m in claims for damage related to the colder than average weather the UK has experienced this winter. The UK has experienced more snowfall than usual and much lower temperatures which have made this one of the coldest winters on record. Insurance claims have risen in line with the weather extremes.

Most of the claims are motor (for accidents on icy roads), property (for frozen pipes which cause flooding) and personal injury for slip and fall type incidents.

The £650m is just for the period of 18th December to the 13th January. The weather there has continued to be cold so the total figure for winter weather damage losses could be much higher. None of the figure takes into account business interruption type losses and economic losses the country and businesses will have suffered due to the weather. Those are not well insured risks right now and that is where weather risk management and alternative risk transfer has a chance to help.

Enabling companies to hedge the risks of these types of weather extreme is where our markets excel. Promotion of weather risk management techniques and application to the small business owner is essential and definitely a viable source of revenue for insurers and risk specialists in the future.

More on the weather losses from the Association of British Insurers here.

Swiss Re is preparing to launch a new catastrophe bond issue under it’s Successor program. The Successor X Ltd. Series 2010-1 notes are designed to provide Swiss Re with protection against U.S. hurricane and European windstorm risks for a period of three years from March 2010 to March 2013.

Most interesting about this new transaction is that Swiss Re have chosen to use PERILS AG (the joint venture set up to aggregate and distribute European catastrophe loss data) as reporting agency for the European windstorm component of the deal. This is the first time PERILS have been involved in a catastrophe bond transaction. This will be seen as a test for PERILS as their data has yet to be used in this way or exposed to so much scrutiny. If successful then this could herald the way for easier issuance of bonds containing European catastrophe risks. Standard & Poor’s used the PERILS industry benchmark for European windstorm catastrophes to come up with their preliminary rating for the notes of ‘B-’.

We’ll keep you updated on this transaction as it comes to market. Further detail will be available in our Deal Directory.

Hedgeweek reports that Bermuda based insurance-linked securities investment manager Nephila Capital has attracted a large influx of new capital from UK institutions during the second half of 2009. Nephila Capital now manages total assets of $2.6b.

Investor interest in the market has been growing over the last year and we’re now at a point where we need new issuance to provide capacity for those investors and opportunities to diversify beyond the U.S. hurricane risk tranches.

Standard & Poor’s has delivered its latest update on the Crystal Credit Ltd. transaction which transferred a portfolio of Swiss Re’s credit reinsurance treaty risk to the capital markets via an insurance linked securitization. Losses on those treaties have been high and the transaction has already had its ratings downgraded by S&P. They’ve been delivering regular updates as and when they’ve received new data from Swiss Re on the actual loss experience.

The latest report from S&P concludes that Crystal Credit is still likely to default. Losses in the 4th quarter of 2009 were inline with expectations and it still expects that losses on the Class C notes will be higher than the attachment point meaning that the principal will more than likely not be repaid in full at maturity.

You can find the full report over on the Standard & Poor’s website.

Tradition Re has announced the completion of the first Dutch auction for Florida hurricane windstorm risks. The deal allowed an unnamed reinsurer to hedge it’s hurricane exposure for the year and we believe this is the first time a Dutch auction has been used for this purpose within the reinsurance market.

The deal was traded using a Chicago Mercantile Exchange (CME) CME Hurricane Index (CHI) Seasonal Accumulated Binary
Option.

It’s great to see a method of hedging usually used in the weather risk and derivatives market brought to the reinsurance marketplace. It adds yet another capital markets risk transfer tool to the reinsurers box and could help to allow smaller reinsurers to transfer their windstorm risk with lower costs than other alternative risk transfer techniques.

Full press release from Tradition Re below:

Tradition Re Hosts Dutch Market Auction for CME-Cleared Hurricane Index Contract

New York, NY, March 3, 2010 – Tradition Re, the U.S. reinsurance division of Tradition, a leading interdealer broker and a  subsidiary of Compagnie Financière Tradition, today announced that it completed a Dutch auction on behalf of a reinsurance market participant wishing to hedge their risk for the 2010 hurricane season in Florida (BHF). Additional capacity was placed subsequent to the auction.

Offers were submitted in the form of point price levels, as traded on the Chicago Mercantile Exchange (CME), for a Florida CME Hurricane Index (CHI) Seasonal Accumulated Binary Option with a strike of 22. The total amount cleared on the CME was 400 lots equaling USD 4,000,000 at a price of 11.43. Formal proposals were submitted to Tradition and executed on March 2, 2010. Participants in the auction encompassed a variety of participants from the reinsurance and financial markets.

“While our core business is traditional reinsurance placements, we are pleased to have tried and succeeded in bringing this innovative auction approach into the (re)insurance market,” commented Patrick Gonnelli, Executive Vice President for Tradition Re.

On March 2, Tradition Re also completed another CHI trade for a Second Event Binary Texas-Florida (GF2) contract with a CHI strike of seven for 1,000 lots equaling USD 10,000,000 at a price of 24.42.

While the recent earthquake in Chile is going to be hugely costly to the Chilean economy and very costly to insurers it won’t have any impact at all on catastrophe bonds as none that have been issued cover that region for quake risk.

The level of insurance penetration in Chile is fairly low meaning that the economic losses won’t be fully covered by insurance. In turn this means that the insurance is less likely to be covered by reinsurance and therefore no-one has seen it as necessary to issue a cat bond to cover Chilean earthquake risks.

Latest estimates from risk modellers such as AIR Worldwide and EQECAT put insured losses at somewhere between the $2B and $8B mark. A similar quake in the right area of the U.S. or Japan would most certainly have triggered a cat bond.

As South American insurance penetration and coverage widens we expect to see reinsurers feel the need to hedge their risks there in the same way they do in the U.S., Europe and Asia. That means that a catastrophe bond in Southern America cannot be far off.

The UK’s Financial Services Authority has voiced it’s concerns over the potential for mis-selling in the life settlements sector. Their concern lies mainly in the fact that these are complex products with many risk factors to be taken into consideration. The FSAS expects providers to be clear about their target investors so as not to lure private investors who do not understand the risks associated with life settlements into the market.

We hope this guidance is taken into account by participants but also hope the FSA allows this fledgling market to mature without stepping in and regulating too heavily. Read the statement from the FSA here.