Volatile weather impacts business profits

Volatile weather impacts business profits

Volatile weather impacts business profits

The FINANCIAL -- The economic impact of increasing everyday weather volatility far exceeds the already huge sums annually associated with natural catastrophes, according to the report by Allianz.


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 US$170 billion2. And what’s more, the direct cost of weather volatility around the world is increasing significantly. According to Allianz, insurers have paid out US$70 billion globally for damages from extreme weather events every year for the last three years alone. Back in the 1980s, “only” US$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 agri-food industry, construction, distribution, energy, tourism and transport.

Despite these losses, many UK businesses are still failing to identify the link between climatic conditions and their own revenue streams, according to Allianz. 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.
 
In the past, many businesses did not know how to protect their profits from unfavorable weather conditions. However, 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.
 
Weather risk management offers a new avenue for companies to create customized responses to the specific weather variables which can affect their business. 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. 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.
 
Availability and access to weather data have improved dramatically over the past decade, further strengthening the argument for strategic weather risk management and enabling protection to be structured even in remote locations around the globe, according to Allianz.