Business still underestimates weather losses and risk solutions on offer

The Munich, Germany-based insurer said that bad weather is 'no longer a good excuse for missed sales targets', adding that the pre-Christmas retail season is one of many examples of key weather risk that companies need to be aware of and actively manage. AGCS' analysis found that annual costs from routine weather variance can triple those from the headline-grabbing global natural catastrophe losses. According to the insurer, such figures explain why there is a growing demand for specialist products to offset losses from unexpected weather. Many businesses, however, still remain unaware of options available to tackle this rising challenge, added AGCS.hideThis month alone has seen such major events such as Typhoon Haiyan in the Philippines and flooding from Cyclone Cleopatra hit Sardinia. These extreme events may capture the headlines, but minor fluctuations in expected weather can have a big impact on business performance across a wide range of industries, said AGCS. According to the report – entitled The Weather Business-How Companies Can Protect Against Increasing Weather Volatility – the impact of routine weather variation on the European Union's economy could total as much as €406bn a year. In 2012 there were some 905 natural catastrophes worldwide, 93% of which were weather-related disasters. These events cost US$170bn, according to AGCS. The insurer also concluded that the direct cost of weather volatility around the world is increasing 'significantly'. AGCS reckons that insurers have paid out US$70bn globally for damages from extreme weather events every year for the last three years. Back in the 1980s, only US$15 billion a year was paid out for such claims. "In the UK, retail is one sector which is heavily exposed to poor weather, especially in the all-important pre-Christmas period when retail footfall traditionally increases by nearly 40%: the 'big freeze' of December 2010 helped to knock retail sales down by 1.4%, with retailers suffering their worst December on record. An analysis of stock market announcements this year shows 17 retailers and consumer goods companies blamed the rain and snow for their financial performance not being as good as expected. Other sectors which can be badly affected in the UK include the agri-food industry, construction, distribution, energy, tourism and transport," pointed out the insurer. Despite the damage wrought by such weather events many UK businesses still fail to identify the link between climatic conditions and their own revenue streams, stated AGCS. To be fair, the range of product available to companies to manage and transfer such risks was not that impressive in the past. But in recent times the market has developed and a far wider range of solutions is now available, pointed out AGCS. "There is now an increasing awareness and interest in 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," stated the insurer. The company explained that through the use of independent weather data, weather risk management products are linked to actual fluctuations against pre-agreed weather indices which, when certain criteria are met, can trigger a payment. Unlike traditional insurance products, no physical damage is required for a payment to be made to the affected policyholder. Measurable variables such as temperature, rainfall, sunshine, snowfall and wind form the basis for these risk indices. Payment is triggered automatically when measurements prove certain pre-defined levels for the selected weather variable(s) have been reached, explained AGCS. This is a critical point, as many risk managers have pointed out to CRE during our annual Risk Frontiers survey that one of the major stumbling blocks to innovation for so-called emerging risks appears to be the inability or unwillingness of insurers to adopt new tools that are not based on the potentially time-consuming insurance contract and traditional claims process. The use of parametric triggers such as those used in weather risk products is often cited as the way ahead by experts. "However 'bad' the weather is, it is no longer a good excuse for disappointing earnings," said 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," he added. "Weather will increasingly be viewed as a core risk to business performance. 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," Mr Berlage added. To download the full AGCS Weather Report go to http://www.agcs.allianz.com/about-us/news/art-weather-report.

Business still underestimates weather losses and risk solutions on offer

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