Volatile weather activity is increasing around the world as evidenced by major events, such as the recent tornadoes in the Midwest or typhoon Haiyan in the Philippines. Yet, while extreme events may capture the headlines, minor fluctuations in weather can have a major impact on business performance across different industries.
The impact of routine weather variation on the U.S. economy could total as much as $534 billion a year, according to a newly released report from industrial insurer Allianz Global Corporate & Specialty SE. For example, the cost of weather-related delays in the U.S. for airlines and trucking companies annually amounts to $3 billion and $3.5 billion respectively and related costs are increasing significantly. Estimates indicate 30 percent of U.S. gross domestic product is directly or indirectly affected by weather and climate ($5.7 trillion of $15.7 trillion).
The economic impact of increasing everyday weather volatility far exceeds the already huge sums annually associated with natural catastrophes, according to the report entitled The Weather Business – How companies can protect against increasing weather volatility. During 2012, there were 905 natural catastrophes worldwide, 93 percent of which were weather-related disasters, costing $170 billion. What’s more, the direct cost of weather volatility around the world is increasing significantly. According to Allianz, insurers have paid out $70 billion globally for damages from extreme weather events every year for the last three years alone. Back in the 1980s, “only” $15 billion a year was paid out for such claims. Seventy percent of all companies are exposed to weather risk, according to the report.
Protecting against the hidden costs of ‘normal’ weather
Despite these losses, many U.S. businesses are still failing to identify the link between climatic conditions and their own revenue streams. Yet, the weather does not even have to be extreme in order to have a negative impact on a company’s cash flow. Sometimes it is enough for it to be uncommon, unseasonal or merely unexpected to generate a decline in revenue.
“However ‘bad’ the weather is, it is no longer a good excuse for volatile revenues, higher costs or disappointing earnings of a business,” explains Karsten Berlage, global head of Weather Risk Management at Allianz Risk Transfer (ART), based in New York City. “Stakeholders are increasingly aware of this. While companies cannot be expected to control the weather, they are now expected to better control the risk of its financial impact. This can be achieved through weather risk management solutions.”
In the past, many businesses did not know how to protect their profits from unfavorable weather conditions. However, there is now an increasing awareness and interest in weather risk management tools, as provided by ART, which enable companies to hedge this risk, similar to interest rates movements and foreign currency exchange rates.
Weather risk management offers a new avenue for companies to create customized responses to the specific weather variables which can affect their business. Using independent weather data, these products are linked to actual fluctuations against pre-agreed weather indices which, when certain criteria are met, can trigger a payment. Unlike traditional insurance products, no physical damage is required for a payment to be made to the affected policyholder. Measurable variables such as temperature, rainfall, sunshine, snowfall and wind form the basis for these risk indices, so a quick payment is triggered automatically when measurements prove certain pre-defined levels for the selected weather variable(s) have been reached.
Availability and access to weather data have improved dramatically over the past decade, strengthening strategic weather risk management and enabling protection to be structured even in remote locations around the globe.
Expanding solutions for a broad range of sectors
- In the field of agriculture, weather risk management solutions are already protecting the crops of farmers across Africa from drought.
- Energy companies – both in the traditional and renewable sectors – are extensively using these solutions to protect themselves against unfavorable seasons and safeguard revenues. Meanwhile, wind farm operators seek protection against low or excessively strong wind to secure cash flow and underpin their financing.
- Retailers can use these tools to hedge against adverse weather conditions that may deter shoppers during Black Friday or other large sales events.
- Car manufacturers may entice potential buyers of convertibles with a “sunshine guarantee”. Owners would be protected against a lack of sunny days if they are unable to have the roof down for a more than a pre-defined period.
A bright forecast
Weather risk management products are becoming more widely used in the US, where they are more readily accepted as a standard feature of companies’ overall risk management. In Europe and other parts of the world, the product is still emerging.
Karsten Berlage anticipates “Weather will increasingly be viewed as a core risk to business performance. Therefore, demand for weather risk management solutions should grow significantly in the future with stakeholders able to reap the benefits of better cash flow stability, more accurate budget management, greater earnings consistency and higher risk-adjusted returns.”
For more information and to download the full AGCS Weather Report go to:http://www.agcs.allianz.com/about-us/news/art-weather-report.
Source: Allianz Global Corporate & Specialty SE
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