The tokenization of weather derivatives is a growing area, highlighted by headline figures on weather-related financial risk worldwide. Since the 1980s the number of registered weather-related loss events has tripled, and over the same interval inflation-adjusted losses have increased fivefold, together representing marked and sustained increases in recorded events and economic losses over recent decades. These trends are set to continue and could threaten assets worth 20 percent of global GDP in aggregate, underscoring the magnitude of exposure captured by those headline numbers.
Weather-related disasters over the past decade have resulted in over $2 trillion in global economic losses, as reported by the World Meteorological Organization. This substantial financial impact emphasizes the importance of understanding and managing weather-related risks. In response to this growing economic challenge, the weather derivatives market has emerged as a tool for financial risk management.
The market’s notional value stands at approximately $25 billion, indicating its significant scale. However, the market is characterized by high specificity, with contracts largely tailored to the unique needs of individual users, which results in limited opportunities for secondary trading. Despite these constraints, the market plays a crucial role in helping businesses hedge against the financial uncertainties posed by weather variations.
“Since the 1980s the number of registered weather-related loss events tripled, and the inflation-adjusted losses have increased fivefold. These trends are set to continue and could threaten assets worth 20 per cent of global GDP.”
Weather-related risks have increased in significance, with weather-related disasters causing over $2 trillion in global economic losses in the past decade, and with the number of registered weather-related loss events having tripled since the 1980s.
The weather derivatives market has a notional value of roughly $25 billion and is highly specific, consisting mostly of bespoke contracts with limited secondary trading. Interest in the tokenization of weather derivatives is emerging.
