Everyone talks about the weather, but no one has ever been able to do anything about it–at least up until now. But with the launch of the Chicago Mercantile Exchange (CME)-Carvill Hurricane Index set for March 12, insurers and customers such as energy companies, utilities, state governments and others will be able to hedge their risk to weather catastrophes. CME-Carvill Hurricane futures and options contracts will trade on the CME and will allow insurers and companies, which were battered by Hurricanes Katrina and Rita in 2005, to transfer their risk onto the capital markets. The ReAdvisory group of Carvill America Inc., a reinsurer, developed the Carvill Hurricane Index; the index uses such factors as maximum wind velocity and size of storm to calculate the potential for damage. Futures and options contracts will be offered for five U.S. regions: the Gulf Coast, Florida, Southern Atlantic Coast, Northern Atlantic Coast and the Eastern U.S.

The hedges are already attracting interest, given their promise of greater efficiency and transparency. "It's a great innovation, [and] particularly where you're talking about the efficiency and transparency of the transaction, capital markets seem to me to be more efficient and transparent than the insurance industry," says Brian W. Merkley, the risk financing manager for Salt Lake City-based Huntsman Corp., a $13.0 billion chemical company that has plants along the Gulf Coast. "I'm still trying to adjust claims from Hurricane Rita–from what I understand about how these hurricane options are going to work, we could have had our money the next day." Merkley plans to compare the hedges to traditional insurance, and suspects that Huntsman may end up with a blended program that's part hurricane hedge and part traditional insurance. "[Hurricane hedging] is certainly something that I've told my treasurer we'll be looking at."

But the hurricane hedges are only the leading front in the convergence of the insurance and capital markets. London-based inter-dealer broker ICAP PLC and insurance and reinsurance broker Jardine Lloyd Thompson Group PLC established a joint venture to broker derivatives and securities based on insurance risks. The joint venture is expected to begin trading insurance related derivatives in about six months. "What interests me is the innovation you're seeing in the capital markets [on insurance related derivatives]," says Merkley.

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