In the winter of 2023 to 2024, many places in the central and eastern parts of the mainland will experience cold waves and freezing rain. Hubei spring tea was affected by the weather, and the yield decreased.
The worries of tea farmers are regarded as the worries of meteorological services for farmers. In December 2023, the mainland's first "Cold Wave Index Agricultural Insurance + Weather Derivatives" was launched in Hubei. "The average temperature is lower than 2°C, which triggers the cold wave index insurance payment conditions, which effectively compensates for the losses caused by the disaster." Charles, an insured tea farmer, said. This is one of the application cases of the "temperature index (insurance) + weather derivatives" model to empower the development of the tea industry.
Innovation: Meteorological data supports risk management
For a long time, people have used catastrophe insurance and other means to avoid catastrophe risks such as typhoons and extreme rainstorms. However, in addition to extreme weather, subtle changes in meteorological factors such as temperature and precipitation can also affect agricultural planting, energy use, etc. Especially in the context of global warming, weather risk management is crucial because weather such as high temperatures can affect agricultural yields. As a result, "meteorological + financial derivatives" came into being.
The Central Meteorological Observatory and the Dalian Commodity Exchange have cooperated to promote the application of "temperature index (insurance) + weather derivatives", and the pilot case has been recognized by many participants.
Central Meteorological Observatory-DCE Weather Series Index Photo courtesy of Central Meteorological Observatory
Since 2004, the Central Meteorological Observatory and the Dalian Commodity Exchange (hereinafter referred to as "DCE") have jointly carried out the research and development of weather indexes, and summarized and analyzed 2 billion meteorological big data in mainland China through machine learning technology. In 2022, on the basis of years of cooperation, the two sides officially released the "Central Meteorological Observatory-DCE Temperature Index".
Based on the authoritative meteorological data of the Central Meteorological Observatory, the temperature index covers 15 benchmark cities such as Beijing, Shanghai, Guangzhou and Harbin, including daily average temperature index (DAT), monthly cumulative average temperature index (CAT), heating index (HDD) and cooling index (CDD). Among them, North China represented by Beijing is an important producing area of corn and wheat, and Northeast China represented by Harbin is the main producing area of soybean and corn.
Central Meteorological Observatory-DCE Weather Series Index Photo courtesy of Central Meteorological Observatory
According to the relevant person in charge of DCE, the temperature index can quantify the cumulative impact of temperature on crop quality and yield over a period of time, and has become an important reference for predicting crop yield, price and output value.
Breakthrough: Weather derivatives empower industrial development
"Weather derivatives are a financial innovation tool designed for non-catastrophic weather risks, and international experience has proven that it can provide effective risk management for various weather risk subjects, helping individuals, such as farmers, to avoid losses caused by abnormal events of non-catastrophic weather. In addition, weather derivatives are a proactive weather risk management strategy, which provides new trading varieties for the mainland financial derivatives market and enriches investment channels. Zhao Rui, deputy director of the Forecasting System Laboratory of the Central Meteorological Observatory, said.
In the face of high temperatures, the aquaculture industry urgently needs effective risk management tools, and air-conditioning companies also want to avoid the operational risks brought about by cool summers. Therefore, the insurance company transfers the risk of compensation to the futures company, and the futures company transfers the risk to the air-conditioning sales company, realizing the closed loop of layer-by-layer risk transfer, which can make up for the loss of income or profit in the physical market.
In August 2023, Guangdong China Life Property Insurance launched the "Aquaculture Temperature Index Insurance + Weather Derivatives", which allows farmers to receive compensation by setting the compensation trigger value, that is, once the temperature exceeds the compensation trigger value on a certain day, farmers can get compensation. Compared to traditional aquaculture insurance, this insurance has simpler trigger conditions and easier claims settlement.
In addition to agriculture, the weather index also covers a variety of industries such as energy, transportation, and construction. "Hedging and transferring weather risks between different entities not only meets the needs of risk averse but also those who prefer risk." Qi Dan, senior engineer of the Central Meteorological Observatory's Science and Technology Achievement Transformation Center, said.
In December 2023, the over-the-counter transaction case of Guangdong's "Cold Wave Index Derivatives for Electricity Sales Enterprises" was launched. As the buyer of the product, Qiushi Energy Technology Co., Ltd. has the right to obtain the exercise income when there is a low temperature and cold wave, which avoids the loss caused by the fluctuation of power supply caused by the cold wave and improves the continuity and stability of the business.
"Temperature index derivatives can help power and energy companies hedge against electricity spot price fluctuations more flexibly and provide more comprehensive and sustainable weather risk protection." Jiang Jiang, general manager of Qiushi Energy Technology Co., Ltd., said.
What to expect: Data element upgrades
The terrain and climate of the continent are complex, the scale of grain and cash crops and aquaculture is large, and the production is relatively scattered, and the demand for temperature index derivatives is strong among agriculture-related entities. Industries such as energy are also affected by temperature changes and require refined risk management.
At present, mainland weather derivatives are in the research and development stage, futures contracts are not listed, and the scale of the weather index insurance market is still small, which is difficult to promote on a large scale. In addition, the agricultural weather index insurance loss ratio is high, the relevant reinsurance channels are few and the cost is high, and there is a lack of other market-oriented risk transfer mechanisms, so the underwriting pressure of insurance companies is greater.
The pilot case of "temperature index (insurance) + weather derivatives" fills the gap in the output risk transfer mechanism in addition to price risk in the "insurance + futures" model, and adds new connotation and new impetus to the "insurance + futures" business.
In the future, the Central Meteorological Observatory and DCE will start with the upgrading of data elements, the development of core technologies, and the optimization of meteorological service systems, and promote the listing process of standardized contract products in the market through the wide application of weather derivatives in the over-the-counter, so as to gradually improve the mainland meteorological financial service tool system.
Author: Xu Nenyu
Editor: Tang Miao Miao Yanli
Release: Bu Yu Review: Duan Haoshu