Chicago Exchange offering futures contracts on ’07 hurricanes

The Chicago Mercantile Exchange is launching contracts that will allow insurers and others to hedge risk against hurricane damage.

The exchange, a unit of CME Holdings Inc., is teaming up with Carvill Group, a reinsurance intermediary that will calculate the contracts’ underlying indexes of hurricane data used to calculate damage. Front contracts will expire when a storm makes landfall, with expiration pegged to the index.

CME said contracts for “CME-Carvill Hurricane Index” futures, and options on futures, will begin trading on the floor and on the Globex electronic platform on March 12.

“Following the 2005 hurricane season that caused an estimated $79 billion in damage, it became apparent that there was limited capacity to insure customer claims,” Felix Carabello, CME’s director of alternative investment products, said in a release. “With these hurricane contracts, insurers and others will be able to transfer their risk to the capital markets and thereby increase their capacity to insure customers.”

CME’s announcement follows one by Nymex Holdings Inc., which will list three new catastrophe risk index futures contracts in March. The Nymex contracts will also trade on CME’s Globex, per an agreement between the two exchanges reached last year.

The move to list alternative investment contracts is a relatively new development for the exchanges. CME currently lists weather contracts based on temperatures in 35 cities worldwide as well as snowfall and frost indexes. Nymex began trading property damage risk contracts last month.

The exchanges’ new risk products provide another way to hedge risk in an area that has primarily been the domain of insurers. In addition to insurers, CME also sees demand from customers such as energy companies, pensions funds, state governments and utility companies.

The new hurricane contracts will be available in five areas: the Gulf Coast, Florida, the Southern Atlantic Coast, the Northern Atlantic Coast and the Eastern United States.

Carvill will calculate the underlying indexes using publicly available data from the National Hurricane Center of the National Weather Service. The Index uses the maximum wind velocity and size, or radius, of each official storm to calculate the potential for damage.

The contracts are part of the CME’s push into more product areas. The exchange offers futures and options on futures on interest rates, stock indexes, foreign exchange, agricultural commodities and energy.

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