By Dan McCue

A service of new financial products allows insurers to spread their hurricane-related risk to the capital markets, but so far, admittedly just weeks after their introductions, hurricane futures haven’t inspired a rush by South Carolina’s largest coverage providers to rethink their refusal to write new policies in areas likely to be hit by damaging and life-threatening tropical weather.

Futures contracts and options of futures contracts for this hurricane season’s first three named storms —  Andrea, Barry and Chantal — went on sale on the Chicago Mercantile Exchange on March 12; since then, interest in the new investment vehicles has been high, but actual sales have not been brisk, said Felix Carabello, director of alternative investments at the exchange.

Instead, he said insurers seem to be taking a wait-and-see attitude, watching to see how aggressively their competitors will be in the market and, in some cases, awaiting the introduction of additional hurricane-related products on the exchange.

“From that perspective, given the newness of these products, a slow start in trading was to be expected,” Carabello said. “However, the premise behind the products remains strong: What these products are is a way for reinsurance companies to transfer existing risk that they have on the books to the capital markets.

“One thing we learned after Hurricanes Katrina and Rita caused over $79 billion in damages in 2005 is that insurance companies don’t have unlimited resources and that there’s a particular concentration of risk. It’s elevated June through November, and it’s centered on the coast,” he said.

“In our view, the best way to address this situation was to create a derivative instrument that allows investors to assume some of the exposure and thereby give insurance companies the opportunity to provide coverage for more properties,” he said.

Carabello said the product works this way: An insurer with, say, $100 million in exposure, could sell a percentage of it, perhaps $70 million, to other firms and eliminate that part of the risk. Using hurricane contracts in this way, insurers can protect themselves and give non-traditional participants in weather-related risk a way to put their capital to work in those markets.

At the same time, utilities, pension funds and state governments might use the contracts to hedge their risk from hurricanes as well.

Firms outside the insurance industry who might want to opt into the market will have to weigh the cost of the contracts against the expense of hurricane insurance.