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Bringing the weather into risk management: A new report on how businesses can better protect themselves

aviation_is_an_industry_affected_by_routine_weather_fluctuationsRisk managers might find of interest a report released last week by Allianz Global Corporate & Specialty entitled: “The Weather Business: How companies can protect against increasing weather volatility.”  The report focuses on the weather risks that businesses face and how companies can protect themselves by using new approaches to the relatively young practice of “weather risk management.”

I found this assertion, developed at length in the report, to be one of the study’s most interesting and thought-provoking premises: 

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

Risk Mapping in Action Before going any further, I should note that in a press release accompanying the report, Allianz makes note of the weather risk management tools provided by its subsidiary, Allianz Risk Transfer, which “enable companies to hedge this risk, similar to the way they might do with interest rate movements and foreign currency exchange rates.” 

Yet, even if your organization has no interest in purchasing the kind of tools provided by a firm like Allianz Risk Transfer, “The Weather Business” is still full of useful information that could enrich the risk manager’s understanding of the ways in which routine fluctuations in normal, everyday weather (as opposed to catastrophic events) factor in to many organizations’ risk profiles. 

Consider, for example, that according to figures provided in “The Weather Business”: 

  • The annual impact of routine weather variances on the U.S. economy is $534 billion.
  • In the European Union, the impact of routine weather variations could total as much as $561 billion annually. 
  • By comparison, there were 905 natural catastrophes worldwide in 2012, 93 percent of which were weather-related, costing “only” $170 billion.

According to “The Weather Business,” catastrophic weather events get the headlines, but relatively minor fluctuations in expected weather can affect performance across a wide range of industries. The aviation, retail, agriculture and energy sectors are just a few of the most prominent examples of industries that are at special risk of revenue loss from variations in expected weather. 

“The Weather Business” also asserts that stakeholders are becoming less forgiving of weather-based justifications for business performance that fails to meet expectations:

Deviations from expected weather is no excuse for businesses incurring volatile revenues, higher costs or disappointing earnings – this is increasingly less accepted by stakeholders. While companies cannot expect to control the weather they are now expected to better control the risk of its financial impact.

I have worked closely with clients and my Aon eSolutions colleagues on the development of our Intelligent Mapping application for the Aon RiskConsole risk management information system; tracking weather events (both routine and catastrophic) is central to the Intelligent Mapping tool. I was, therefore, especially interested in how Allianz defines weather risk management in its report, and how weather data plays into this specialized practice:

Weather risk management is the management of financial risks that are directly or indirectly linked to the occurrence of an observable weather event or variability in a measurable weather index. Crucially, no physical damage is required for a payment to be made, unlike with traditional insurance products.

Such products focus on the use of weather data – measurable weather variables such as temperature, precipitation, sunshine, snowfall and wind – as the basis for risk indices. Protection is based around the accurate recording of independent weather data.

It’s all very thought provoking and worthy of the risk manager’s time to read the Allianz report. Whether an organization utilizes weather risk management tools like those offered by Allianz, risk mapping tools like those from Aon eSolutions, or neither of them, it seems undeniable that more than ever, stakeholders expect companies to be attuned to fluctuations in routine weather and how those variations impact performance. 

Mark LeVeque is a Product Consultant with Aon eSolutions, based in the Atlanta office. Contact Mark at mark.leveque@aon.com

RMIS Guide

Dec 17, 2013

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