The Wonk Room

Global Boiling: Climate Change Makes Weather A ‘New Risk Class’

The Associated Press writes that weather derivatives — used by companies to hedge against weather-related losses — “are one of the fastest growing segments of the commodities market.” How they work:

Investors, who sell weather derivatives, agree to take on the risk for a premium. Investors will profit from these transactions if nothing extraordinary weather-wise occurs. If the weather goes bad, the company that bought the derivative collects an agreed-upon amount.

The weather derivatives market is exploding. Begun in the late 1990s, trading in weather derivative contracts now values in the tens of billions of dollars a year. As Brian O’Hearne, head of the reinsurance company Swiss Re’s Environment and Commodity markets in New York, told the Associated Press:

Weather is becoming more volatile, and we recognize this as a new risk class.

A 2005 Swiss Re report spells out our responsibility:

Climate change is a fact: one of its effects is an increase in the volatility and unpredictability of weather events, for example maximum and minimum temperatures, the number of hot or cold days and precipitation levels. Human activity contributes to climate change, but it can also help mitigate its effects on weather events.

Extreme weather has always been deadly, but manmade global warming is bringing an “increase in frequency of hot extremes, heat waves and heavy precipitation.” The investment community is recognizing this fact, and taking steps to deal with the risk. The question facing our country now is whether our media and politicians will.