BusinessWeather risk management should be part of companies’ overall risk management
Volatile weather activity is increasing around the world. While extreme events such as typhoon Haiyan in the Philippines or flood Cleopatra in Sardinia may capture the headlines, minor fluctuations in expected weather can have big impacts on business performance across a wide range of industries. A new report focuses on the growing importance of weather risks for businesses, highlighting the economic impact of fluctuating weather conditions and how companies can protect themselves, using new approaches to “weather risk management.” Weather risk management products are already widely used in the United States, where they have become more readily accepted as a standard feature of companies’ overall risk management.
Volatile weather activity is increasing around the world as evidenced by recent major events, such as typhoon Haiyan in the Philippines or flood Cleopatra in Sardinia. Yet, while extreme events may capture the headlines, minor fluctuations in expected weather can have big impacts on business performance across a wide range of industries.
Minor fluctuations, or routine weather variance, include any variation from the average data for temperature, dew point, wind speed and direction, precipitation, cloud cover and heights, visibility, and barometric pressure for a given period.
An Allianz release notes that in a new report, The Weather Business: How companies can protect against increasing weather volatility, which focuses on the growing importance of weather risks for businesses, industrial insurer Allianz Global Corporate & Specialty SE (AGCS) highlights the economic impact of fluctuating weather conditions and how companies can protect themselves, using new approaches to “weather risk management.”
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 (£346 billion /$561 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, according to Munich Re. What is 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.
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 which can be badly affected include the agrifood industry, construction, distribution, energy, tourism and transport.
Protecting against the hidden costs of “normal” weather
Despite these losses, many U.K. 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.
