NEW YORK, Aug 28 (Reuters) - A swift business is being done in Gustav-linked derivatives as energy companies and insurers scramble to cover themselves and others speculate the tropical storm will become a hurricane and wind its way into the Gulf of Mexico in coming days.
Insurance brokerage Carvill is among the companies to sell catastrophe, or cat, derivatives to plug gaps in reinsurance capacity that can follow disasters, such as Hurricane Katrina.
Of particular interest to energy companies are so-called cat-in-the-box products, which cover a specific geographic area that is home to many offshore oil and gas rigs.
“We have energy companies buying to protect rigs in the Gulf with the cat-in-the-box product ... while (coastal contracts) cover the landfall of the storm, and are being bought by insurers, reinsurers and hedge funds,” Patrick Gonnelli, president of Carvill Capital Markets, said in a phone interview.
Katrina, which made landfall three years ago on Friday, was the costliest storm on record, with insurers paying out some $50 billion in claims from damage on the Gulf Coast.
On Thursday, Gustav was forecast to strengthen into a hurricane in coming days as it neared the Gulf of Mexico, home to a quarter of U.S. crude oil production and 15 percent of its natural gas output.
Gonnelli said others are buying derivatives “on pure speculation because it (Gustav) looks like it is going to go into the Gulf.”
Demand for Carvill’s single-named storm contracts comes days after the CME Group’s (CME.O) Chicago Mercantile Exchange began trading this type of hurricane option, citing high customer demand.
Named-storm contracts are only valid for the life of the storm, in this case Gustav, and each is tied to a specific level on the Carvill Hurricane Index. A payment is triggered if the storm reaches the level the customer bought at.
For many buyers, besides being a quick and additional source of reinsurance coverage, another benefit is the quick settlement time, usually within days. This is in contrast to traditional insurance contracts that may take months or years to settle, depending on the type of coverage. (Editing by Braden Reddall)