Weather risk management products are customizable to meet the needs of hedgers. These customized hedges will sometimes result in situations where the Standard Settlement Methodologies are inadequate. This may arise with very large weather transactions especially where they cover weather risks in more remote areas. As part of a feasibility assessment we may determine that the best solution involves the installation of weather stations.
Over the past decade Speedwell Settlement Services has been involved in numerous projects involving the installation of weather stations to support weather risk transfer contracts. Since 2009 we have installed localized observation networks in Chile, Colombia, and Uruguay, with feasibility studies conducted globally.
Why We Install Weather Stations
With a weather hedge it is ideal to have the point of observation as close as possible to the risk location. Large distances between the points can result in substantial basis risk (risk that the weather observed will be different from the weather at your risk location).
For situations where there isn't an existing weather station a new weather station can be installed and then used as the primary station for the transaction. This new weather station will provide the ongoing data updates needed for the transaction. Historical data used for actuarial analysis must be synthesized such that the transaction can be priced.
Advanced Quality Control
For some situations Speedwell Settlement Services will recommend the implementation of an advanced quality control program in order to produce Settlement Data.
Typical situations include:
- Remote locations lacking nearby observations that would typically be used in the Settlement Data Methodology
- Locations that have unique meteorological microclimates
- Hedges based upon instrumentation owned and/or operated by the hedger
- Locations that are especially susceptible to moral hazard
Weather station installation for advanced quality control will involve the installation of a new modern observing platform in close proximity to the primary weather station. This newly installed station will be physically secure, utilize modern observing equipment / communications, and observe numerous weather variables at a high temporal resolution. Information provided by this weather station will be input into the Settlement Methodology in order to produce Settlement Data for the transaction. Please contact us for additional information as to how exactly this information is used.
Type of Equipment
The technical specification of the weather stations installed by Speedwell Settlement Services varies from situation to situation based upon project requirements.
Weather stations will typically meet the following criteria:
- Scientific grade observing instrument
- Solar power with battery back-up
- Satellite or cellular communications systems
- Physical and technological security in order to guard against theft and tampering
Where possible, redundant systems will be installed to ensure uninterrupted station operations.
Project Costs / Feasibility Study
The cost of a station installation project varies from situation to situation. Project costs often reflect a complete solution combining the equipment leasing, installation, and operation as well as the production of Settlement Data.
In addition to standard Settlement Data costs, the costing of projects will consider:
- Type of equipment
- Location of the project
- Length of the project
- Availability of land
Due to the unique nature of each solution we require that a feasibility study be completed as a first step for any project. Feasibility studies involve an assessment of available resources as well as recommendations of what will be required to achieve the project goal. Feasibility studies may be conducted remotely, but often require an on-site visit in order to best asses the situation. The result of the Feasibility Study is a report outlining our recommendations, an implementation plan, and costing of the project.