A. Weather derivatives will not totally replace insurance contracts but there are a number of significant differences. Insurance contracts cover high risk, low probability events whereas weather derivatives cover low risk, high probability scenarios. With weather derivatives the payout is designed to be in proportion to the magnitude of the phenomena. Weather insurance pays a one off lump which may or may not be proportional and as such lacks flexibility. Insurance normally will pay out if there has been damage or loss.
Weather derivatives require only that the index has passed a certain point.
Weather derivatives are index-based securities, which allows many players to participate in the market. This increased liquidity will reduce the cost of contracts. It is possible to monitor the performance of your hedge during the life of the contract. Additional shorter term forecasting towards the end of the contract might mean that you wish to remove yourself from the derivative. Because it is a traded security there will always be a price at which you can sell or buy back the contract.