With a massive snowfall pounding the East Coast of the United States, it's a bit difficult to worry about hurricanes right now.  But there's one group that never stops worrying: insurers. The 2005 hurricane season cost insurers almost $54 billion, and while they caught a break in 2006, predictions call for increased hurricane activity for the rest of the decade. How will they hedge their risks?

We got our answer today: indexes.

The Chicago Mercantile Exchange (CME) has teamed up with the reinsurance company Carvill to create a new Hurricane Index (and related futures and options contracts) that should help insurers lay off risk. 

The index is designed to improve on the popular Saffir-Simpson scale, which ranks hurricanes on a scale of 1-5.  The inadequacy of that measure was revealed by Hurricane Katrina, which merited only a "3" rating, but caused untold destruction.

Unlike the Saffir-Simpson scale, which focuses exclusive on wind speed, the new measure incorporates the geographic size of a storm into its calculations. Katrina, for instance, was a massive storm, stretching hundreds of miles, and part of its destructive power lay in the scope: huge regional rainfall, massive storm surge, etc. (For more, see here. 

The CME will list contracts in March, covering five zones: the Gulf Coast, Florida, the Southern Atlantic Coast, the Northern Atlantic Coast and the Eastern U.S. Contracts will be issued for each hurricane, and will expire when the storm makes landfall. The contracts will settle at the Carvill Hurricane Index measurement at landfall.