History

The weather derivatives market (weather market) has been in existence since the 1990's. In 1996, Aquila Energy structured and executed a dual-commodity contract for Consolidated Edison (ConEd). The contract allowed ConEd to purchase electric power from Aquila, but also gave ConEd a rebate if temperatures were cooler than normal during the contract period.

During this time, the weather market grew substantially as large energy players like Enron, Aquila and Duke established trading desks along with marketing/origination functions to bring new players into the market. Insurance companies like Swiss Re and AIG also entered the market as the non-correlated asset class, along with its predetermined risk limits, provided opportunity to diversify their risk portfolio.

Standardized weather contracts were first listed listed on EnronOnline, and later the Chicago Mercantile Exchange began listing its own set of weather contracts, and also provided clearing services for industry players. The CME contracts are still listed today.

With Enron's implosion, the weather market entered a multi-decade period of stagnation. Interest and volumes dropped significantly as the large liquidity providers exited.

Climate Change Renews Interest in Weather Derivatives

Recent large-scale climate events like deadly storms, extreme flooding, and prolonged heat waves have brought a renewed interest in weather derivatives. These events more and more are believed to be caused by climate change, and therefore expected to continue.

In addition, markets in general have a much broader base of participants nowadays. Day-trading the financial markets in particular is now an activity a large number of people use to supplement their income as the economy has shifted over time.