Global Warming and Financial Umbrellas

Weather derivatives have emerged as a generally acknowledged, if not widely utilized, risk management product within the past 5 to 10 years. The authors of this article compare the costs and benefits of weather derivatives in relation to insurance contracts for hedging weather risk, within the context of long-term trends in hedging demand due to global warming. The article finds that, as global warming results in increased climactic variation and greater frequency and intensity of climatic anomalies (i.e., higher volatility), derivatives may provide coverage at a lower cost than standard insurance.