Japanese discovering weather insurance as a silver lining

By Fumishige Asano, Komaki Ito and Miho Yoshizaki
Bloomberg News Service

TOKYO — Shinto priests are doing more than praying to the sun goddess Amaterasu for clear skies. They're buying weather derivatives.

A tour group is photographed at Tokyo's Yasukuni Shrine. Shinto shrines, which get fewer contributions when poor weather discourages visitors, are among the growing market for weather derivatives. Bloomberg News Service

Sales of weather derivatives in Japan rose fourfold to about 40 billion yen ($344 million) in the year ending in March, according to Japanese insurers. With the return this year of El Nino, the global weather pattern that caused 1.2 trillion yen of damage in Japan in 1993, that figure is expected to keep rising.

"The number of worshippers increases when it doesn't snow too much over New Year," said Yasuhiro Shiobara, chief priest at the shrine on Mount Akagi in Gunma, where as many as 30,000 people come to pray in December.

Sompo Japan Insurance Inc. sells derivatives tailored for shrines to reduce such risks, according to Masato Fujikura, a manager of the alternative solutions section at the company. Shiobara declined to say whether his shrine purchased weather derivatives.

While wide-scale trading of weather derivatives was pioneered in the United States by Enron Corp. and rivals in 1997, it wasn't until last year that Natsource Japan Co., a joint venture of trading house Mitsubishi Corp. and Natsource LLC of the United States, began to offer the contracts in Japan.

Natsource's customers include Sumitomo Corp., Bank of Tokyo- Mitsubishi Ltd., Mitsui Sumitomo Insurance Co. and Toa Reinsurance Co., which use the derivatives to offset their own risks from selling weather insurance.

Raining on the economy

Four out of five companies in Japan are affected by changes in the weather, according to Tokio Marine & Fire Insurance Co. El Nino, typhoons and prolonged rain could hurt the economy just as it's showing signs of recovery. "The economy doesn't change the weather, but the weather can change the economy," said Yoji Hiranuma, an official at Japan's Meteorological Agency.

Tokyo Electric, or Tepco, Japan's largest utility, plans to expand weather derivative trading with Osaka Gas Co. and Tokyo Gas Co. to more than 700 billion yen during the three months ending in September. While Tepco benefits from higher electricity demand for air conditioners in summer, gas companies gain when colder-than-normal weather boosts demand to fire water heaters.

"Companies can't blame weather for losses any more because shareholders and rating companies are becoming more strict about their risk management," said Sompo Japan's Fujikura.

Cold call

In the United States, the weather derivatives market rose 72 percent to $4.3 billion in the year ended March, the Weather Risk Management Association said. North America accounts for 97.5 percent of the $7.5 billion world market for the derivatives.

While trading in the United States is dominated by large companies such as power providers, in Japan many smaller companies have entered the market, said Sompo Japan's Fujikura.

"If we guess the weather wrong, our candy production will be in vain," said Takayuki Kajimoto, a manager at candymaker Imaoka Seika Corp., which sells more ginger, menthol and green-tea-flavored sweets to ease the throat during dry weather. "With weather derivatives, our profits won't fall by so much."

Cloud cover

Insurers are creating new services. Tokio Marine, for example, sells typhoon or hurricane insurance for entertainment companies that may see events washed out by storms.

As well as its contracts for shrines, Sompo Japan sells a rain derivative for golf clubs, and snow-based derivatives for ski resorts and tire makers. sales drop in cloudy weather.