The Tokio Marine and Fire Insurance Co. is planning to structure in the coming weeks what is believed to be the first typhoon derivatives contract. "It's the first of its kind in the world," said Toshihiko Aizawa, head of the product development group in Tokyo. He added, "Typhoons are a constant concern for people and companies in Japan--we expect a lot of demand for this product."
Typhoon derivatives are tailor-made and structured as puts or calls referenced to a designated number of typhoons in a specific area. In the case of a call option, if the number of typhoons is above the strike level, the purchaser receives a set payout regardless of the dollar value of the damage. Typically, the trade will be structured to cover the summer months as there are more typhoons at this time.
Aizawa said the insurer is offering the product now because of the growing awareness of weather derivatives products in Japan. Premiums for the options will range from JPY5 million (USD38,800) to over JPY100 million. In an example trade, Tokio would sell a call for a premium of JPY100 million, with a strike of one typhoon. If there is more than one typhoon in the designated area the holder of the option receives JPY200 million for every extra typhoon. This would have a cap at five or 10 typhoons. In an average year, about 30 typhoons hit Japan, noted Aizawa.
The products are aimed at companies with exposure to typhoons, such as hotels or restaurants as they would lose business in such an occurrence, but Aizawa declined to give a specific example or speculate on the amount of protection Tokio Marine expects to sell. Aizawa added that a contract is triggered if a typhoon is declared by the Japan Meteorological Agency and enters the selected area, typically a circle with a radius of 150 kilometers.
A rival weather derivatives structurer in Tokyo questioned the potential for the products. "It's way too expensive," he said. An official at Tokio Marine said the product will be priced at fair value and will not be too expensive compared to other weather products.
