Weather Derivatives - R+V Versicherung

Weather Derivatives
The challenge of managing weather risk in
renewable energy
Teresa Schorstein
26. September 2012

Table of Contents
1) About CelsiusPro
2) Climate Change and Environmental Stress
3) Weather Derivatives at CelsiusPro
4) Weather Risk Management Market
5) Weather Derivatives and Renewable Energy
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Part 1
About CelsiusPro
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Profile
� CelsiusPro AG: Swiss based, Founded 2008, 6 Employees
� CelsiusPro Australia Pty Ltd: Founded 2012, 4 Employees
� Industry: Weather Risk Management
� Product: Tailored Weather Derivatives (OTC Options)
� Strategic Partnership: Swiss Re
� Association: Weather Risk Management Association (WRMA)
� Award: 2009 Swiss Insurance Industry Award for Innovation
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About CelsiusPro
What we do:
� Enable companies to hedge themselves against financial losses due
to adverse weather
� Provide liquidity and transparency to the weather market
� Educate industries in quantifying weather risk
� Reduce the complexity for clients to do weather derivative
transactions
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Countries and Weather Stations
6

Part 2
Climate Change and Environmental Stress
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Climate Change - Trends
IPCC identifies three major effects of
climate change on extreme weather:
Trend of:
� Warmer temperatures
� More extreme temperatures
� Heavier precipitation
� Longer droughts.
Source: IPCC, Intergovernmental Panel on Climate Change
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Source: National Oceanic and Atmospheric Administration (NOAA)
Temperature
Earth’s overall temperature has increased
by 1.3°F (0.7°C) since 1900. In the graph,
average annual surface temperature is
shown as the difference from the average
for 1901-2000.
Glaciers
Since 1980, a representative set of well
studied glaciers has lost the equivalent of
40ft.(12.5m) of water on average. The
graph shows the average mass balance of
30 reference glaciers around the world.
Spring Snow Cover
Earlier melting of winter snow has reduced
the area of land covered by snow in
spring. The graph shows the area covered
by snow in the N. Hemisphere during
March and April, shown as the difference
from the 1971-2000 average.
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Source: National Oceanic and Atmospheric Administration (NOAA)
Ocean Heat
More than 90% of the warming that has
occurred on Earth over the past 50 years
has occurred in the ocean. The graph
shows heat energy in the top 700m of the
ocean as the difference from the average
from 1955-2006.
Sea Level
The average height of the ocean’s surface
has increased by 8.25”(210 mm) since
1880. The graph shows mean global sea
level measured by tidal gauges since 1880
and by satellite instruments since 1993.
Arctic Sea Ice
The area of the Arctic where sea ice
remains frozen at the end of summer has
decreased by more than 10% per decade
since 1979. The graph shows the average
area with at least 15% sea ice on its
surface each September.
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Source: NOAA

Part 3
Weather Derivatives at CelsiusPro

Weather Derivatives
Characteristics:
� European style capped option on climate parameter
� Cash settled
� Based on the measurements of the national meteorological office
Defined by the following attributes:
� Weather Station
� Contract Period
� Weather variable or underlying
� Index which aggregates the weather variable
� Payoff function, which converts an index into the cash flow
� Premium
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Weather Indices / Difference to Insurance
Typical weather variables are:
� Daily Temperature (average, maximum or minimum)
� Rainfall or Snowfall / Snow depth
� Wind, Carbon Dioxide, Pressure, River Flow, Sun Radiation, Waves Height
� Hourly Rainfall (or other hourly weather)
The underlying weather measurements are aggregated with a function to a
weather index.
The key differences between weather derivatives and insurance:
� Weather derivatives are financial contracts and not insurance contracts.
� No proof of losses or damages are required.
� The payout is not in relation to losses or damages but solely to the values
measured at the weather station (index based).
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Weather-Sensitive Industries
� Transportation
� Utilities
� Travel and Leisure
� Construction/Mining
� Events
� Retail and Wholesale
� Agriculture
� Marketing
� Renewable Energy
15

How it works
� Linked to measurements of a particular
weather station.
� The national meteorological office
delivers the values
� At expiry of the certificate the contract is
settled and paid out
Budapest:
WMO Nr. 12843
Lat. 47.43
Lng. 19.8
Alt. 138
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Weather Derivatives Terminology
1. The Weather Station is the official measurement station which is used for
price calculation and settlement.
2. The period between the Start Date and the End Date is the Risk Period. Start
and End Dates are always included.
3. The Threshold defines when a day counts as a Critical Day.
4. The Strike defines the amount of Critical Days of own risk. The Payout per
Critical Day starts only once the number of Critical Days counted during the
risk period exceeds the Strike value.
5. The Payout per Critical Day is the amount paid for every Critical Day in
excess of the Strike.
6. The Maximum Payout is the payout limit of the certificate. It is usually a
multiple of the Payout per Critical Day.
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Contract Example: Rain Day (1/3)
Risk period und location
� Period: 01.03.2011 –07.03.2011 (7 days)
� Weather station: Frankfurt Airport
Weather index definition
� Certificate type: Rain Day (Call)
� Threshold: > 5mm per day
Payout definition
� Strike: 2 Rain Days
Payout size definition
� Payout per Rain Day: EUR 10‘000
� Maximum Payout: EUR 50‘000
60.000
50.000
40.000
30.000
20.000
10.000
Premium: EUR 4‘012 0
Payout in EUR
Payout Profile
0 1 2 3 4 5 6 7
Rain Days at Expiry
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Contract Example: Rain Day (2/3)
Weather derivatives are index based products.
Example: Rain Day Certificate
Pays out a pre-defined amount for every day the daily rainfall is above 5mm.
� Index: Number of Rain days > 5mm
Rainfall measurement:
Payout calculation:
(Index –Strike) * Payout per Rain Day
(4 –2) * 10‘000 = 20‘000
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Contract Example: Rain Day (3/3)
Strike
normally set between average (At-the-Money) and average + 1.5 StDev (Out-ofthe-Money).
Maximum Payout
is the product of: (Payout per index point * (Exit-Strike)). The exit is normally set
as historical extreme or average + 3-4 StDev.
Cover
Example:
Payout per Rain Day: EUR 10‘000 *
(Exit: 7 Rain Days –Strike: 2 Rain Days)
= Max Payout: EUR 50‘000
Strike Exit
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Part 4
Weather Risk Management Market

Weather Risk Management Market
Market:
• First Weather Derivatives were used in 1997
• Launch at CME in 1999
Volume:
• Number of traded contracts, futures and OTC options rose 35% from
2007 to 2008 from 730,000 to 985,000
• Nominal value of traded contracts rose 68% from USD19bn to USD32bn
Geography:
• Starting from the USA to Canada, Europa and Japan
Products:
• Variety has increased strongly from temperature-based to precipitation,
snow and even hurricane
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Traded @ Product Description
Exchange Industry Loss Warranties
Hurricane Futures & Options
Hurricane Landfall Options
Weather Derivatives
OTC CAT Bonds
Weather Derivatives
IFEX - The buyer selects …
� Insured event (e.g. tropical wind)
� Trigger in total industry loss units (Industry Loss Index
provided by PCS)
� CME Hurricane Index (CHI ) measures the
potential damage from a hurricane by reference to its
maximum wind velocity and size
� Binary options are used in the same way as the
Industry Loss Warranties
� Call options on whether and where a hurricane will
make first landfall on the U.S. Atlantic and Gulf coasts
� National Hurricane Center determines whether a storm
made landfall as a hurricane
� Premiums aggregated into mutual risk pool
� Payout is pro rata share of the pool
� Products are only available for major cities in the US
� Selected indices (HDD, CDD, frost, snowfall, rainfall)
� alternative to traditional reinsurance,
� event triggered by natural catastrophe
� insurance company issues bonds (through) investment
bank
� no-event situation: Insurance company pays coupon to
investors
� event situation: principal is forgiven, money used to
pay claims
� location- specific products available
� indices tailored to individual company’s weather
exposure
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Convergence of Re Insurance and Capital Markets
Competitive landscape in the weather risk business.
Local Banks
Insurance Markets Banks
Offer limited products upon Capital Markets
Lloyds Offers weather solutions mainly
to large events, don’t offer solutions for
many other sectors.
National Hail Insurance offer hail cover
and drought covers.
AON, March Large international
insurance broker across all
insurable risk categories.
XL Insurance Used to be big in
weather but reduced business
after subprime losses.
Swiss Re Largest weather risk capacity.
Munich Re Largest Reinsurance company,
weather strategy unclear
Nephilia risk capacity Weather Bill,
Bermuda based
Insurance
Brokers
AON
March
XL Insurance
Re Insurance
Swiss Re
Munich Re
Renaissance Re
Ren Re
Nephilia
Insurance
Lloyds
National Hail
Insurance
Weather
Risk
Hypo Vereins.
Hypo Tirol
Bayrische
Exchanges
LB
Weather Risk
Specialists
Galileo
Weather Bill
New Weather Risks
CelsiusPro (CP)*
MSI Guaranteed Weather
CME, Eurex
request
Hedge Funds
Cumulus, Coriolis,
D.E. Shaw, Tudor,
PCE Investors
Commodity Broker
ICAP, TFS,
Evo Markets,
CBS AU*,
DCA NL*
Chicago Mercantile Exchange
Offer limited products and stations including
snowfall HDD, CDD, CAT.
Eurex Offer only hurricane products.
Cumulus , Coriolis, Weather specialist HF
D.E. Shaw, Tudor Large international HF
dealing across all asset classes
Commodity Broking Services (CBS)
Australian partner company of CP,
DCA Dutch partner company of CP,
ICAP, TFS Large international broker across all
asset classes
Weather Bill Hourly Contracts, Online Pricer, backed
by Nephilia
New Weather Risks UK partner of WB
Galileo Hourly Contracts, Swaps and Collars, no
Online Pricer
MSI Guaranteed Weather World wide weather
stations, Homepage is complicated
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Part 5
Weather Derivatives and Renewable Energy

Wind Energy –CP Wind Index (1/3)
� Replicates the slope of the power curve
� Serves as a good proxy for hedging production risk
� Established by using 1 kWh as 1 index point
� Approximates the power curve of a 2MW turbine.
m/s CP Wind Index
0 0
1 0
2 20
3 50
4 100
5 200
6 400
7 600
8 800
9 1,000
10 1,200
11 1,400
12 1,600
13 1,800
14 1,900
15 2,000
16 2,000
17 2,000
18 2,000
19 2,000
20 2,000
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Wind Energy –CP Wind Index (2/3)
Correlation: The graph shows the
correlation between the monthly
power production and the monthly CP
Wind Index at the station Aberdeen.
Production (KwH)
16500000
14500000
12500000
10500000
Correlation Production vs CP Wind Index
8500000
6500000
4500000
2500000
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31
Month
14000
12000
10000
8000
6000
4000
2000
Production CP Wind Index
CP Wind Index
Regression: The graph shows the
regression between the monthly
power production and the monthly CP
Wind Index at the station Aberdeen.
CP Wind Index
14000
12000
10000
8000
6000
4000
Regression Production vs CP Wind Index
y = 0.0008x + 560.7
R² = 0.8285
2000
2500000 7500000 12500000 17500000
Production (KwH)
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Wind Energy –CP Wind Index (2/3)
Payout Profile
Period: 01.01.2013 - 31.03.2013
Strike: 7,500 CP Wind Index Points
Tick: EUR 10 / CP Wind Index Point below 7,500
Maximum Payout: EUR 550,000
Payout in EUR
60.000
50.000
40.000
30.000
20.000
10.000
0
Payout Profile: CP Wind Index Put Option
Number of CP Wind Index Points
Option Payout
28

Hydro Power –Dry Season Certificate (1/2)
Hydro Power Producers are dependent on sufficient precipitation.
To hedge against the risk arising from below average precipitation Hydro
Power Producers use Dry Season Certificates
Cumulative Precipitation in mm
900
800
700
600
500
400
300
Cumulative Precipitation 1. May - 31. October
2009 2008 2007 2006 2005 2004 2003 2002 2001 2000
Cumulative Rainfall
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Hydro Power –Dry Season Certificate (2/2)
Payout Profile
Period: 01.10.2013 - 31.10.2013
Strike: 530 mm
Tick: EUR 5,000
Maximum Payout: 1,000,000 Payout in EUR
Payout in EUR
€1.200.000
€1.000.000
€800.000
€600.000
€400.000
€200.000
Payout Profile: Dry Season Certificate
€0
290 310 330 350 370 390 410 430 450 470 490 510 530 550 570
Cumulative Precipitation in mm
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Many thanks for your attention!
Teresa Schorstein
Business Development & Third Party Sales
(+41) 44 205 99 13
teresa.schorstein@celsiuspro.com
www.celsiuspro.com
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