According to weather expert predictions, the 2007 Atlantic Hurricane Season will see above-normal storm activity. As we remain in this warm phase of a multidecadal oscillation cycle, the same experts anticipate active storm seasons for years to come.
As companies look to manage their weather risk, more and more are turning to catastrophe futures–futures contracts linked to catastrophe exposures–in addition to traditional insurance. In fact, according to the Weather Risk Management Association, weather risk contracts traded in fiscal-year 2007 totaled $19.2 billion, up from only $4.6 billion in 2004. And 2006 saw a record $45.2 billion.
Organizations exposed to property damage may find these financial instruments a good alternative to traditional insurance. Unlike normal property insurance, it makes no difference whether the investor is attempting to hedge an exposure to loss or simply making a bet. The trading market will be settled in cash on the outcome of an index.
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