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Asian Market Update

Asian Market Update. October 5th, 2006 Hideki Nii Asia-pacific Committee Co-chair Goro Shiina Mitsui Sumitomo Insurance Co., Ltd. 1.Asian Market. Total Number of Contracts in Asia dealt by WRMA members (Adapted from Weather Risk Management Association 2006 Survey Results) 　.

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Asian Market Update

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  1. Asian Market Update October 5th, 2006 Hideki Nii Asia-pacific Committee Co-chair Goro Shiina Mitsui Sumitomo Insurance Co., Ltd.

  2. 1.Asian Market Total Number of Contracts in Asia dealt by WRMAmembers (Adapted from Weather Risk Management Association 2006 Survey Results) 　

  3. 2-1．Japan Market • Type of products Only Weather derivatives <INDEX> ・ Temperature ・ Rainfall • ・ Snowfall　 • ・ Wind Speed • ・ Humidity • ・ Combination of the above etc. • We have not seen any hybrid products such as weather & commodity price products. Day Count Cumulative Average etc.

  4. 2-2．Japan Market • Market Situation • (1)Large-sized Company in Utility Sector • It has been growing more popular for electric power and gas companies to hedge their temperature risk through weather derivatives. • (2)Large-sized Company in other than Utility Sector • It is rare for a large-sized company to utilize weather derivative products as a hedging tool against weather risk. • (3)Small and medium-sized Company • There has been steady growth in the use of standardized weather derivatives products with small payouts and premiums across a wide range of industries.

  5. 2-2．Japan Market Problems to be solved in the future Limited Market Liquidity ＊Limited development of a secondary market

  6. March,2000 April,2004 <Deregulated Sector> (1)Extra high voltage power service for industrial and commercial customers with contract power exceeding 2,000KW <Deregulated Sector> (1)Extra high voltage power service for industrial and commercial customers with contract power exceeding 2,000KW (2)High voltage power service for industrial and commercial customers with contract power ranging from more than 500KW to less than 2,000KW <Total share in power output>26% <Total share in power output>40% 2-3．Japan Market -electricity deregulation The scope and the timetable of electricity deregulation

  7. April,2005 April,2007 ?? <Deregulated Sector> (1)Extra high voltage power service for industrial and commercial customers with contract power exceeding 2,000KW (2)High voltage power service for industrial and commercial customers with contract power ranging from more than 500KW to less than 2,000KW (3)High voltage power service for industrial and commercial customers with contract power ranging from more than 50KW to less than 500KW The examination of an appropriate date for starting full deregulation will be commenced around April 2007. <Total share in power output>63% <Total share in power output>100% 2-3．Japan Market -electricity deregulation The scope and the timetable of electricity deregulation

  8. 2-4．Japan Market -gas deregulation The scope and the timetable of gas deregulation April,2004 2007 <The scope of retail deregulation> (1)Gas service for consumers with contracts of 500,000 cubic meters and over <The scope of retail deregulation> (1)Gas service for consumers with contracts of 500,000 cubic meters and over (2)The examination of retail deregulation of consumers with contracts of 100,000 cubic meters and over is scheduled to be commenced. <Total share in gas supply>44% <Total share in gas supply>50%

  9. 2-5.New Legislative Framework for Investor Protection Financial instruments and Exchange Law passed in the Diet(Japanese Legislature) and is scheduled to take effect in 2007. Weather derivatives are subject to the law. Investors are classified into two types of “professional investor” and “general investor”. In sales and solicitation to “general investor”, stricter obligations than now are anticipated to be imposed on financial institutions.

  10. 2-5.New Legislative Framework for Investor Protection Small and medium-sized companies which constitute unique Japan weather derivatives market are anticipated to be almost classified into “general investor”. Just in case where stricter obligations than now such as more strengthening of accountability before conclusion of a contract become burdensome for financial institutions, a negative impact against an expansion of weather derivatives market of small and medium-sized companies will might happen.

  11. 3.New Move outside Japan • Korea • Weather derivative products have not yet officially been approved. • The Financial Supervisory Service classified the index-based weather insurance as a use-and-file type insurance in May, 2006. • Korean insurance companies are allowed to sell index-based weather insurance. • Sum Insured : 30% of average turnover of past 3 years • 100% of average cost of past 3 years

  12. 4.Market Situation outside Japan (1)Taiwan Weather derivative products are approved by a competent authority and a kind of weather-index insurance has already been launched. (2)India A permission from a competent authority for launching weather derivative products has been sought . Weather-index insurance has already been launched.

  13. Typhoon Derivatives

  14. What is the Typhoon Derivatives? • “Typhoon Derivatives” has been traded in Japan since 2002. • Parametric index defined by the route(track) of the center of the typhoon determines the payout amount. • The purpose of this product is to cover a consequential damages. • The target clientsare ... • Middle/small sized company • Tourism, Leisure, Retail sales etc.

  15. Definition • Tropical cyclone • Generic term for a non-frontal synoptic scale cyclone originating over tropical or sub-tropical waters with organized convection and definite cyclonic surface wind circulation. • Typhoon • A tropical cyclone with the maximum sustained winds of 64 knots (32.7 m/s, 118 km/h) or more near the center.

  16. The RSMC Tokyo - Typhoon Center • The Regional Specialized Meteorological Center (RSMC) Tokyo - Typhoon Center is one of the six Regional Specialized Meteorological Centers (RSMCs) responsible for analysis, tracking and forecasting of tropical cyclones within the framework of the World Weather Watch (WWW) Program of the World Meteorological Organization (WMO). • The RSMC Tokyo - Typhoon Center provides information on tropical cyclones in the western North Pacific and the South China Sea including present and forecast positions, movement and intensity of tropical cyclones. *RSMC Tokyo Typhoon Center is operated by Japan Meteorological Agency (JMA).

  17. Trade Example • Example • Place : Fukuoka • Method : Number of passage of the center of typhoon in the defined circle. • Radius : 100km for weight 1.0, 300km for weight 0.5 • Period : from Aug.1,2005 to Oct.31,2005 • Type : Call option • Strike : 0.0 • Tick size : JPY 10 mil • Max payout : JPY 70 mil

  18. Index Type • Circle type • The index is counted up if the center of the typhoon passes the circle defined by the fixed radius from the observation point. • Gate type • The index is counted up if the center of the typhoon crosses the gate defined by the two points. • The locations of the center of typhoon and observation point are defined using the latitude and longitude.

  19. Data • Japan Meteorological Agency (JMA) provides the typhoon data. • (A) “Zenpan Taifu Joho” (General typhoon information) • Reported promptly. • Provided on the real time feed network. • (B) “Best Track Data” • Announced after 3 or 4 months • Provided on the web site and CDROM. • “Zenpan Taifu Joho” is used for the fixing/settlement. • “Best Track Data” is applicable from 1951.

  20. Data (2004)

  21. Data format 66666 0409 22 0012 0409 0 6 KOMPASU -> No.9 of 2004 season -> KOMPASU - name 04071400 002 3 209 1243 998 035 -> July 14 2004, 00:00(GMT) -> 002 (fixed) -> 3 (Tropical Storm) -> 20.9 deg (Latitude), 124.3 deg (Longitude) -> 998 hectopascal -> 35 knot

  22. Risk Analysis • Hedge trade is impossible because of the low liquidity in the market. • Actuarial risk analysis is required for the portfolio management. • The following slide will show the geographical and temporal diversification of the Typhoon derivatives.

  23. Risk Analysis - Correlations

  24. Risk Analysis - Correlations

  25. City Latitude Longitude Portfolio A B C Tokyo 35°41′24″ 139°45′36″ ○ ○ Shizuoka 34°58′30″ 138°24′12″ ○ Nagoya 35°10′00″ 136°57′54″ ○ Osaka 34°40′54″ 135°31′06″ ○ ○ Hiroshima 34°23′54″ 132°27′42″ ○ Kochi 33°34′00″ 133°32′54″ ○ Fukuoka 33°34′54″ 130°22′30″ ○ ○ ○ Nagasaki 32°44′00″ 129°52′00″ ○ Kagoshima 31°33′12″ 130°32′48″ ○ ○ Okinawa 26°12′24″ 127°41′06″ ○ ○ Shanghai 31°14′00″ 121°29′00″ ○ Taipei 25°02′30″ 121°30′30″ ○ Kaohsiung 22°37′00″ 120°16′30″ ○ Manila 14°35′00″ 120°59′30″ ○ HongKong 22°16′30″ 114°10′00″ ○ Risk Analysis – Risk Profiles • Sample Portfolio

  26. Risk Analysis – Risk Profiles

  27. Risk Analysis – Risk Profiles • Sample Trade • Radius : 200km for weight 1.0 • Period : from Jun.1,2006 to Oct.31,2006 • Type : Call option • Strike : 1.0 • Sample Portfolio • (A) Single city • (B) Ten cities in Japan • (C) Ten cities in Asia • Total max payout : JPY 1,000 mil • Total premium : JPY 200 mil

  28. Risk Analysis – Risk Profiles

  29. Summary • Typhoon derivatives has been traded in Japan since 2002. • The quality, quantity, objectivity and cost of the Typhoon historical/real time data are sufficient for set up the Typhoon derivatives. • The common weather derivatives such as temperature swap, shows the high correlation between two of Japanese cities. On the contrary, the portfolio of Typhoon derivatives is well diversified in Japan.

  30. Thank You Contact Information Hideki Nii Manager, Head of ART Section, Financial Solutions Dept. Goro Shiina Financial Sol. & Dev. Section, Financial Solutions Dept. Mitsui Sumitomo Insurance Co., Ltd. Phone:+81-3-3297-4601, Fax:+81-3-3297-6965 E-mail: hideki.nii@ms-ins.com / gorou.shiina@ms-ins.com

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