MSI GuaranteedWeather develops dual-trigger weather derivative

MSI GuaranteedWeather, LLC, a weather risk transfer focused subsidiary of MS&AD’s Mitsui Sumitomo Insurance Co., Ltd. (MSI), has developed a dual-trigger weather derivative product to help a renewable energy producer hedge the effects of two weather variables at the same time.

In its first-use case, the dual-trigger weather derivative has been put to use for Looop Inc., a renewable energy company and power producer/supplier (PPS) headquartered in Tokyo, Japan.

Looop Inc. worked with MSI GuaranteedWeather to develop the product, as it had a specific weather related business issue that it wanted to solve.

The product is designed for solar energy producers and can protect them against adverse impacts associated with cool days combined with high amounts of solar radiation.

This unique combination of weather risks can reduce market prices for electricity, and an electricity provider (whose production source is photovoltaic panels, or solar) can find its revenue negatively impacted by this combination of weather effects.

MSI GuaranteedWeather believes that the nature of a dual-triggered weather derivative can be used in a range of other situations as well, where the combined effects of multiple-weather phenomena can be tied to a business impact or need.

What’s interesting here is that, being derivative in nature, it’s possible the same structure could be utilised for other types of dual-trigger parametric insurance or reinsurance arrangements.

There are numerous potential use-cases for such a structure, that could help businesses or indeed insurance and reinsurance companies, to hedge weather related perils in a more sensitized manner using dual trigger inputs.

This particular use-case for a solar energy producer/provider will offer financial payouts based on agreed upon Japan Meteorological Agency (JMA) temperature and solar radiation measurements over a defined period.

The goal is to mitigate agains the risk of fluctuating electricity prices caused by a combination of events – a dual trigger.

Taking the example of a cool, yet sunny day, the triggers are both lower demand (due to cool temperatures) and higher available volumes of electricity (due to high levels of solar radiation resulting in higher than expected output from the photovoltaic operations).

“This is an exciting, innovative deal. By fusing solar radiation and temperature data to trigger payments, MSIGW has provided a new risk management tool to Looop – an instrument that can materially help Looop achieve its goal of providing a stable and cost-effective electricity supply to their clients,” explained Bradley Hoggatt, Chief Portfolio Manager for MSIGW.

“This dual-trigger weather risk management product represents an innovative step forward in the development of customized weather risk management products for renewable energy providers,” added Brad Davis, President and CEO of MSIGW. “More and more we are seeing dramatic economic impacts caused by unexpected weather, and any business (whether in the renewable segment or elsewhere) that does not seek to protect against weather-driven risks, is operating with a less than complete risk management program.”

For Looop, this product will help to stabilise revenues by protecting it both on the demand and supply side of solar energy production and supply.