IMO, the really good point you raise is similar to the point raised by Wondering. That’s a question of weatherbill’s creditworthiness. This is a VERY important question that needs to be addressed.

-JD

I also listened to the interview (thanks for the link), and was a little shocked to hear the CEO say they have no real competitors. Doesn’t seem like they did very good market intelligence there as plenty of insurance companies will write this type of coverage (parametric insurance etc) and also see the link above to GuaranteedWeather–looks like they have been doing this for several years now.

You are correct with your explanation if there was an EXCHANGE. But, there is not. This company is taking on all the risk by writing these derivatives. They don’t have an exchange to offset their risk, nor would dealer or market maker want to synthetically create one to offset it.

These guys are playing a fools game – it’s called trying to track what nature is going to do next.

What happened to Long Term Capital is that this group of “geniuses” were looking at regressions of spreads in the foreign debt markets. Similar to what market makers use to do with currency spreads when they were fixed to each other – i.e. British pound against the Deustchemark. Since the probability of the spread exceeding X standard deviation was small, they were making money hand over fist while the gettin was good.

Guess what happened? These idiot geniuses were responsible for Greenspan to lower rates in 1998 3 times since the US banks were on the verge of getting hammered.

Guess what caused that? The spreads went further than their “complicated algorithms” predicted. Since they were managing 4 -5 bilion dollars, and the banks were giving them credit on billions more, they had a portfolio worth hundreds of billions of dollars.

I think if these investors paid me several millions dollars, I would save them more millions from this tragic model of weather forecasting.

Anyone have a stone to make world class soup?

“Qualified investors” or not, if this business ever gets traction, it will be eventually shut down for running an unlicensed gambling site. It’s that simple.

It may work as a gambling company though, the house never loses. Or an option market.

A good simple example would be two businesses: one sells umbrellas and the other sells ice cream. No one likes to eat ice cream when it is raining and no one needs an umbrella when it is sunny and warm. So these two businesses set up a weather swap where the umbrella guy pays the ice cream man $100 if there is 1″ or more of rain and the ice cream man pays the umbrella guy $100 if there is no rain, or rain less than an inch. This way they offset the risk and neither has to go bankrupt for lack of appropriate weather. What weatherbill seems to be doing is setting themselves up as market makers. They want to be in the middle making sure that either the umbrella guy or the ice cream man can find someone to take their weather risk. If weatherbill has someone on each side of the trade then they have no worries but if they get lopsided then they have to buy reinsurance. But that’s a more complex subject!

Keep in mind that neither the umbrella guy or the ice cream man are gambling. They are just willing to give up some of their profits from good times in order to get some financial coverage when things go bad. If they DIDN’T do the weather swap they would be gambling that the weather would go their way. So the weather swap actually helps them reduce risk! Quite the opposite of gambling where people take on MORE risk.

-JD

I don’t even know what the point of the AJAX is, besides as a marketing gimmick that will hopefully get WeatherBill into the MSM and in front of HNWI.

Regardless, I don’t think individuals or businesses with that kind of money making serious insurance decisions would do it themselves, and the CFO’s or Advisors who would do it for them probably have good enough tools already.

Thanks for the story, just found your site and like the design a ton!

Cheers from Canada

A

-JD

Allen.H

This, alongside the reports of other pricing issues, leaves me unimpressed despite my initial excitement when this was first posted this a few weeks ago.

I asked an insurance industry executive about WeatherBill and he had some questions over the legality of what they’re doing so I hope these “all star” investors did their due diligence. I agree with w. heisenberg that these investors are technology people and not finance people therefore it’s not that impressive that they bought into it. It sounds great in theory but when I ask somebody from the insurance industry and she points out potential problems, I would have been a lot more impressed if their “all star” investors came from an industry related to the business. That would have been a real endorsement.