Wind derivatives are financial instruments designed to mitigate losses caused by adverse wind conditions. With the rapid growth of wind power capacity due to efforts to reduce carbon emissions, the demand for wind derivatives to manage uncertainty in wind power production is expected to increase. However, existing wind derivative literature often assumes normally distributed wind speed, despite the presence of skewness and leptokurtosis in historical wind speed data. This paper investigates how the misspecification of wind speed models affects wind derivative prices and proposes the use of the generalized hyperbolic distribution to account for non-normality. The study develops risk-neutral approaches for pricing wind derivatives using the conditional Esscher transform, which can accommodate stochastic processes with any distribution, provided the moment-generating function exists. The analysis demonstrates that model risk varies depending on the choice of the underlying index and the derivative’s payoff structure. Therefore, caution should be exercised when choosing wind speed models. Essentially, model risk cannot be ignored in pricing wind speed derivatives.

The approaches to liability valuation, assessment of prudential capital and measurement of profit for life offices are undergoing radical change. A common thread runs through all of these proposed changes — each change represents a move away from traditional actuarial approaches towards a more economically coherent, market-consistent approach. These changes should encourage a general improvement in the life industry's risk management processes. However, they will come at a cost. The measurement of the economic risks generated by the complex guarantees written by life offices is far more difficult than applying the latest resilience test equity fall. This will require a step change in the sophistication of life offices' risk and capital measurement and management know-how. The measurement of value, risk and capital will soon demand the application of ‘stochastic’ modelling tools. In this paper, we explore some of the issues raised by the application of these approaches to the valuation and risk management of with-profits business.