Magazine article Risk Management

The Risk Forecast: How Businesses Can Mitigate Increasing Weather Volatility

Magazine article Risk Management

The Risk Forecast: How Businesses Can Mitigate Increasing Weather Volatility

Article excerpt

Insurers have the bills to prove that damages from weather-related natural catastrophes are rising rapidly, But weather does not have to be extreme in order to have a negative impact on cash flow--sometimes it is merely enough for it to be uncommon, unseasonal or even unexpected.

Volatile weather activity is on the rise, as is awareness of its impact on business performance. Deviations from expected weather can challenge any company's revenues, expenses or profits. The weather risk management market enables businesses to actively manage such financial risks based on the weather event or variability in question--be it temperature, rainfall, snow, wind or any combination of these factors.

As more companies turn to this market in search of solutions for weather-related business risks, it is responding with increasingly innovative products worldwide. Despite growing awareness of the problems weather risk management addresses, however, many business professionals do not understand the sector. As a result, a number of organizations are unaware of the safeguards available and the opportunities to be derived from changes to expected weather.

Weather risk management is the supervision of financial risks that are directly or indirectly linked to the occurrence of an observable weather event or variability in a measurable weather index. Coverages are based around the accurate recording of independent weather data, which is then utilized in a tailored index matching a company's revenue sensitivity. Without this, there can be no transaction. Availability and access to weather data have improved dramatically over the past decade, strengthening the argument for strategic weather risk management and enabling coverages to be structured even in remote locations around the globe.

The skill in weather risk management is to identify or construct the right index in such a way that it accurately represents the client's business.

Weather Risk Rising

Insurers have the bills to prove that damages from weather-related natural catastrophes are rising rapidly. Between 1980 and 1989, the industry paid out $15 billion per year for weather damage. Between 2010 and 2013 alone, this reached $70 billion a year, Allianz reported.

But weather does not have to be extreme in order to have a negative impact on cash flow. Sometimes it is merely enough for it to be uncommon, unseasonal or even unexpected. For many businesses, small changes in temperature, rainfall, sunshine, snowfall or wind levels can mean a large change in income.

Weather impacts all commercial activities, with 70% of companies exposed to severe weather risk. Weather-related delays cost trucking companies in the United States up to $3.5 billion a year. Weather is also the cause of approximately 70% of the delays in the U.S. National Airspace System, costing at least $3 billion, according to the Federal Aviation Administration.

Based on 2012 figures from the World Bank, the National Center for Atmospheric Research (NCAR), the National Science Foundation (NSF) and Allianz Global Corporate and Specialty, an estimated 30% of the U.S. GDP--$5.7 trillion of the $15.7 trillion total--is sensitive to the weather. The impact of routine weather variance on the economy is as much as 3.4% of U.S. GDP or $534 billion, NCAR and NSF report. This sum does not include additional costs associated with extreme weather events, such as hurricanes or tornadoes.

Impact of Weather Variances on Businesses

Sectors such as energy, retail, food, clothing, tourism, distribution, transport and construction are just as sensitive to minor changes in the weather as they are to changes in interest and foreign exchange rates.

Energy companies are particularly vulnerable to variations in temperature and, as countries begin the switch from fossil fuels or nuclear to renewable sources, the sector is currently undergoing significant change. …

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