SMART products

Learn about our Structured Meterological Alternative Risk Transfer (SMART) products

Summary

Weather volatility has significantly hindered projects for corporates and governments alike. Our clients have reassessed their approach to managing financial burden during flooding years or conversely in drought. We have focused on delivering alternative risk transfer solutions as traditional products will not hedge the risk adequately.   Our clients can add secondary triggers to their products (E.G. Commodity prices) or use other strikes as a proxy for weather energy generation.

Hydro market highlights:

  • $1 trillion of global economy is currently exposed to weather risk (US Energy Department)
  • Growing recognition of the commercial need to hedge weather exposure
  • Regulatory pressures are rising
  • Natural counterparties (financial markets) are willing to assume large and/or customized risks

Indicative Products

Upon review of a Hydro client’s portfolio, we believe we can mitigate drought risk through application of a several standalone products individually or several products in tandem, a few examples of which are outlined below and defined further herein (these products are indicative based on the client's business and the risks they face, though we can develop products to cover other risks, not only drought):

  1. Put option on rainfall
  2. Put option on flow speed
  3. Put option on flow volume

Option 1: Rainfall

Weather Index (inches of rain)
Cumulative Rainfall in Area
Location 1: Dam at [TBD]
Location 2: River monitoring station at [TBD]
Location N: [TBD]
graph of rainfall weather index showing how rainfall decreases trigger payments made
 Risk Period
 [January 1, 2017 – December 31, 2017]
 Put Trigger
 [35 inches]
 Notional
 [$500,000] per inch
 Limit
 [$5,000,000]
 Pay-out
 Client receives payment during years when rainfall is less than Put Trigger. Client is paid $500,000 for each inch of rain under the Trigger. Payments offset financial impact of decreased water flow and/or additional costs associated with water shortages (lack of production)

Option 2: River Flow Volume

 Weather Index (million acre-feet)

Weighted Water Year 

 Risk Period
 [January 1, 2017 – December 31, 2017]
 Put Trigger
 [5 MAF]
 Notional
 [$2,500,000] per MAF
 Limit
 [$5,000,000]
 Pay-out
 Client receives payment during years when water flow volume is below average. When flow is low [< 5 MAF], Client is paid [$2,500,000] for every MAF below strike of put option [up to $5M]. When flow is high [> 5 MAF], no payment is made
 Weather Index (river flow rate)  Cubic feet per second (CFS) flow rate
 Risk Period  [January 1, 2017 - December 31, 2017]
 Put trigger  [5,00 CFS]
 Notional  [$500,000] per 100CFS
 Limit  [5,000,000]
 Pay-Out  Client receives payment during years flow speed is below average over the course of one year. Client paid $500,000 for each 100 CFS under the Trigger]


It is important to note that these options are scalable, (i.e., $5M of Limit can be expanded to $25M, $50M, or $100M). ILS investors have supported bonds as large as $1.5BN, so we are confident that capacity exists for the right risk / reward.

Considerations When Finalizing a Weather Product

Most weather solutions iterate around 5 variables, as seen below:

1. At what location(s) does weather has an impact?

  • Defined at a particular facility or region
  • Multi-section across a range of facilities (and potentially different geographies)?
2. What is the relevant period?
  • Spring, summer, fall or winter season?
  • Monthly, weekly, seasonal, or annual?
  • Single year or multi-year cover?
3. What is the main risk variable?
  • Weather (i.e.rainfall, drought, snow, temperature, frost) or catastrophic event?
4. What is the trigger?
  • What is the most appropriate data source?
  • Single trigger or dual trigger?

We have the ability to tie in commodity prices, PPAs, and other energy contracts when further fine tuning the trigger.

5. How does the financial payment work?
  • Full limit with a binary pay-out if threshold is crossed?
  • Corridor pay-out between two data points?

The Process

Depending on form, the process can take anywhere from two weeks to a month to issue and close a transaction.

Steps:

  • Identify client desire(s) and need(s)
    • Educate client on options and process
  • Work with our client and lead investor(s) to determine:
    • Coverage & Terms
    • Price Target
  • Finalize structure with lead investor(s)
  • NDA execution & documentation preparation (Reveal Client’s identity and subject investors to confidentiality)
  • Negotiate final documentation (Insurance policy, Swap, or Bond Risk Transfer Agreement)
  • Syndicate and allocate (e.g. which investors will be supporting the deal)
  • Settlement and funding of trust (if applicable)