Demand for risk management tools protecting against ‘normal’ weather set to grow

Demand for weather risk management tools is expected to grow, as “routine weather variation” has a greater impact on businesses in various sectors, according to a new report from Allianz.

 Weather risk management tools use independent weather data and “are linked to actual fluctuations against pre-agreed weather indices which, when certain criteria are met, can trigger payment,” according to Allianz.

That means that actual physical damage isn’t required for a policyholder to receive payment, the company says.

Such products, already well-recognized in the United States, according to Allianz, are set to become more common in the United Kingdom and European markets.

Those areas have been hit hard in recent years by weather events, and the cost tied to weather is likely to rise, according to the report.

Allianz estimates that the impact of routine weather variation (or “normal” weather) on the European Union’s economy could total as much as $561 billion per year.

“However ‘bad’ the weather is, it is no longer a good excuse for disappointing earnings,” Karsten Berlage, global head of weather risk management at Allianz Risk Transfer (ART) commented in a statement.

“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.”

Weather risk management is already in use in several sectors, the company points out. In Africa, crops are protected through such tools, and energy companies (both traditional and renewable) use such solutions to protect against “unfavorable seasons,” according to Allianz.

Wind farm operators also can receive protection against low or extremely high winds, “to secure cash flow and underpin their financing,” the company notes.

The retail sector could also potentially benefit from weather risk management solutions, since retailers could see lower earnings when weather causes changes in demand for seasonal products, or when shoppers stay home because of heavy rain, Allianz says.

“Weather will increasingly be viewed as a core risk to business performance,” Berlage added. “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.”