by Shane Henson — January 6, 2014—While the winter season has business owners and their facilities managers working to reduce the potential negative impact of snow and ice on their companies, the arrival of spring is not necessarily a time that companies can forget about the weather—and neither is summer or fall.
According to a new report from industrial insurer Allianz Global Corporate & Specialty (AGCS), volatile weather activity is increasing around the world, as evidenced by recent major events such as Typhoon Haiyan in the Philippines and the Cleopatra flood in Sardinia, and abnormal weather activity can have big impacts on business performance across a wide range of industries.
The company’s report, The Weather Business—How Companies Can Protect Against Increasing Weather Volatility, focuses on the growing importance of weather risks for businesses, and highlights the economic impact of fluctuating weather conditions and how companies can protect themselves, using new approaches to weather risk management.
Weather volatility costs
According to the report, the economic impact of increasing everyday weather volatility far exceeds the already huge sums annually associated with natural catastrophes. AGCS estimates that the impact of routine weather variation on the European Union’s economy could total as much as 406 billion a year. As a comparison, during 2012, there were 905 natural catastrophes worldwide, 93 percent of which were weather-related disasters, costing $170 billion.
Moreover, the direct cost of weather volatility around the world is increasing significantly. In addition, 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, says AGCS.
AGCS notes that in many countries, retail is one sector which is heavily exposed to poor weather, especially in the all-important pre-Christmas period when retail footfall traditionally increases significantly. Other sectors that can be badly affected include the agri-food industry, construction, distribution, energy, tourism and transport.
Despite these losses, many businesses are still failing to identify the link between climatic conditions and their own revenue streams, AGCS stresses. 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.
Weather risk management solutions
AGCS says that companies desiring to protect their profits from unfavorable weather conditions should consider taking advantage of weather risk management tools, as provided by AGCS subsidiary Allianz Risk Transfer (ART), which enable companies to hedge this risk, similar to the way they might do with interest rate movements and foreign currency exchange rates.
Weather risk management offers a new avenue for companies to create customized responses to the specific weather variables that can affect their business, AGCS explains. 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.
Crucially, unlike with traditional insurance products, no physical damage is required for a payment to be made to the affected policyholder, explains AGCS. 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.
“However ‘bad’ the weather is, it is no longer a good excuse for disappointing earnings,” says Karsten Berlage, global head of Weather Risk Management at ART. “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.”