"The Forecast is Insured"
Years ago we would purchase rain insurance for the St. Patrick's Day Parade. In 1788, Benjamin Franklin first proposed crop insurance for storms, blight and insects and the first tornado insurance policy was issued in 1865. The Tobacco Growers' Mutual Insurance Company of North Canaan, Connecticut wrote the first hail insurance policy in 1887. As noted in a previous column, a new type of coverage for weather began with weather derivatives or coverage involving low-risk and high-probability weather. It also represents an agreement or formal contract between two or more people or companies designating the price of a given asset. Similar to an insurance policy, derivatives are used as a contractual mechanism to hedge risk. Weather derivatives are structured using standard weather indices and are applied to weather situations.