The "temperature index insurance + derivatives" model is sustainable DCE held a publicity class for temperature index application projects in Beijing

As a large peach grower in Pinggu District, Beijing, Lao Fan takes out policy-based agricultural insurance every year to transfer the losses caused by natural disasters, but several abnormal weather changes in 2023 have made it difficult for him. "In the middle and early April of last year, the average temperature here reached 19 degrees, the peach blossoms were in full bloom, and the peach trees were growing well, but I didn't expect the temperature to drop suddenly in the second half of the year, resulting in the final production being reduced by half. Lao Fan told reporters, "This year, the insurance company recommended a meteorological index insurance to me, without the traditional loss assessment model, you can get compensation when the cooling reaches a certain level, the key is to listen to the insurance company because they transfer the risk through derivatives, so the premium of this product can be lower, I think this model is particularly good, I tried to insure some." ”

Behind the meteorological index insurance in Lao Fan's mouth is the mainland's first "fruit tree cold wave index insurance + derivatives" pilot project that just landed in Pinggu District, Beijing at the end of March.

In order to serve more market players with weather risk management needs on a larger scale and better realize the in-depth integration and application of meteorology and finance in serving the real economy, on April 17, the temperature index application project publicity class sponsored by DCE and co-organized by CCB Futures and CPIC Property Insurance was held in Beijing.

"Meteorology× Finance" has added a new scene to help agriculture

The reporter learned in the publicity class that the "Central Meteorological Observatory-DCE Temperature Index" has received extensive attention from the market in the past two years, and since 2023, futures companies, insurance companies and other financial institutions have carried out 5 pilot projects for the commercial application of the temperature index. Through a number of pilot projects, the participating institutions have gradually explored the path of weather index and its derivatives to serve the real industry, providing new ideas for industrial operators to deal with weather risks such as high temperature and production reduction, cold wave and frost damage.

The pilot project of "Fruit Tree Cold Wave Index Insurance + Derivatives" is based on the daily average temperature index of Beijing Station in the "Central Meteorological Observatory-DCE Temperature Index". During the insurance period, once the index falls and touches the trigger value, the insured can lock in the agreed payout amount. In the specific operation, the insured purchased cold wave index insurance from CPIC Property & Casualty, and CPIC transferred the compensation risk to CCB Futures' risk management subsidiary, CCB Trading, through over-the-counter derivatives, and CCB Trading and an asset management institution acted as counterparties to transfer the risk again.

According to Song Jianguo, deputy general manager of CPIC Property & Casualty and president of Tai'an Agricultural Insurance Research Institute, CPIC Property & Casualty and CCB Futures have cooperated to actively apply the "Central Meteorological Observatory-DCE Weather Index" to provide cold wave accident risk protection and weather index OTC derivatives risk hedging for peach trees in Pinggu District, Beijing, and extend the scope of application of the "insurance + futures" innovative model to peach, a non-futures variety. "The expansion from market price risk to meteorological risk is another new attempt in the field of domestic agricultural risk management, and it is also a new beneficial practice for insurance institutions and futures institutions to cooperate to serve the real economy. Song Jianguo thinks.

Ge Wenjie, Deputy Secretary of the Party Committee and President of CCB Futures, evaluated the pilot project with "three innovations", one is the innovation of the target, and the development of derivative products based on the temperature index of unlisted futures varieties further expands the means of the futures industry to serve the real economy. The second is the innovation of covering the varieties of agricultural products, aiming at the peach as a cash crop, serving new varieties with a new model, reasonably combining temperature fluctuations with yields, and realizing effective compensation for the weather risks faced by peach farmers, which also has reference significance for follow-up services in more fields. The third is the innovation of the hedging model, in the absence of a standardized on-site market, from the perspective of asset allocation to find third-party investment institutions for risk transfer, which will provide a reference for future pilot promotion.

Zhang Jiancheng, deputy director of the National Meteorological Center, pointed out that the mainland is one of the countries with the most serious meteorological disasters, and in recent years, the direct economic losses caused by meteorological disasters have averaged more than 330 billion yuan, twice that of the United States. Accelerate the development of financial meteorological services, expand the new track of professional meteorological services, form a new quality productivity of meteorological services as soon as possible, and improve the national financial risk management and control capabilities, which have a strong practical foundation and industry needs. The application of the temperature index and its derivatives business model will bring new opportunities for meteorological escort to the development of new quality productivity, and it is expected that more achievements can be implemented to contribute to the high-quality economic and social development and the construction of a modern socialist power.

Derivatives have a unique role to play in general weather risk transfer

In the publicity class, experts in various fields combined with the experience of all parties in the operation and implementation of the project and the market demand faced in the usual work, and carried out a warm exchange on the project model, especially for the unique role of derivatives in the transfer of weather risks, the experts at the meeting believed that compared with traditional insurance tools, derivatives provide a benefit-compatible solution for the transfer of general weather risks, and have a certain degree of commercial sustainability.

In the view of Liu Yi, manager of CPIC's Sannong Innovation R&D Center, "temperature index insurance + derivatives" enables enterprises and farmers who "rely on the sky to eat" to change from passive bearers of weather risks to active managers of weather risks, and expand the applicable varieties from limited futures varieties to many non-futures varieties affected by meteorological fluctuations, effectively meeting the most urgent general weather risk protection needs of farmers. At the same time, as an innovative "reinsurance" approach, it also provides a new idea for the transfer of meteorological risks of insurance companies.

In the design of the temperature index OTC derivatives of the project, CCB Commercial and Trade adopts a daily observation put option, which can lock in the amount of compensation to the policyholder when the underlying falls to the trigger value on any day during the insurance period. Jin Shixing, co-general manager of CCB's derivatives department, believes that catastrophe insurance products are more suitable for dealing with low-frequency major catastrophic weather, while for high-frequency and general meteorological risks, the use of derivatives linked to weather indices as a risk management tool is more cost-effective, and the impact of temperature changes on crop yields is one of the typical scenarios. In addition to the product structure used in this project, a variety of customized weather index options, forwards, swaps and their combinations will be able to be adapted to the needs of more industries, maturities and risk scenarios in the future. In addition, if temperature index futures can be listed in the future, there will be more counterparties, and the efficiency of risk hedging and management will be further improved.

The reporter also learned at the meeting that unlike the previous subject with the opposite appetite for weather risk as the object of risk transfer, the "Fruit Tree Cold Wave Index Insurance + Derivatives" product also innovatively introduced asset management institutions as the main body of risk undertaking in the back-end. "Weather changes have different, or even opposite, impacts on different entities, and derivatives are characterized by the ability to effectively hedge and compensate for their impacts through counterparty mechanisms. Alternative investments related to the low return performance of traditional assets can bring a unique income structure to asset management plans and improve the stability of investment portfolios, which is the main reason why asset management institutions are willing to choose weather index derivatives as investment targets although they will not be affected by weather changes. Jin Shixing said.

In this regard, the representatives of the investment institutions who participated in the publicity class also said that the study found that weather changes have a low correlation with asset value changes, and that the alternative investment of weather index derivatives into the existing asset portfolio can significantly reduce the volatility of the asset portfolio and form a unique income structure, which is very attractive to investment institutions, and combined with the risk management needs of the main body with different weather risk preferences, it provides a sustainable market foundation for the expansion of the "temperature index insurance + derivatives" model.

The temperature index and weather derivatives market have broad room for development

In addition, the experts at the meeting also discussed the characteristics of weather risks faced by industrial and agricultural production entities, the development of weather index insurance and its improvement direction, and the expansion of the application scope of the "weather index insurance + derivatives" model, and put forward opinions and suggestions on deepening meteorological and financial cooperation, strengthening the analysis of the relationship between changes in meteorological factors and economic output, and speeding up the weather derivatives in the market.

Experts said that "temperature index insurance + derivatives" provides a new idea for the mainland's weather risk management, and the project application pilot has strong demonstration significance. Further promoting projects and promoting the development of the weather derivatives market will become an important fulcrum for implementing the requirements of the "Outline for High-quality Development of Meteorology (2022-2035)" on "actively developing financial, insurance and agricultural futures meteorological services", strengthening the cooperation between the meteorological department and the financial sector, providing China's strategy for responding to climate change, and effectively enhancing the resilience of the real economy to resist weather risks.

According to the relevant experts of DCE, in fact, the international weather derivatives market was born in the 90s of the 20th century, and the weather index insurance was basically born at the same time. In 1997, two U.S. energy companies signed the world's first over-the-counter weather swap, followed by the Chicago Mercantile Exchange (CME) in 1999. At present, the international market has shown a good ecology of weather derivatives and weather insurance index insurance, forming a three-dimensional risk management system including insurance, catastrophe bonds, and weather derivatives, and entity operators and insurance institutions have become the main forces involved.

In the mainland, the exploration and practice of weather derivatives has kicked off, and it is expected that the weather derivatives market and its related product application models will bring greater surprises to the industry and financial circles in the future. (Reporter Zhang Jianguang)