Hedging Against Weather-Related Risks

Transportation firms, like airlines and trucking companies, are well-acquainted with weather-related costs, to the tune of around $3 billion and $3.5 billion, respectively, in the U.S. each year. And the total cost to the U.S. economy from weather changes could be as high as $534 billion annually, according to insurer Allianz Global Corporate & Specialty SE. That figure addresses so-called normal weather only. In total, the estimate is that “30 percent of U.S. gross domestic product is directly or indirectly affected by weather and climate ($5.7 trillion of $15.7 trillion).”

In a new report, “The Weather Business – How Companies Can Protect Against Increasing Weather Volatility,” the firm attempts to address the known effects of both normal and abnormal weather events, as the national discussion about the possible effects of increasing extreme weather grows.

While the amount paid out by insurers globally for extreme weather damage has risen to $70 billion per year, up from around $15 billion per year in the 1980s, many U.S. companies remain unaware of available risk mitigation options, or are simply not taking advantage of them.

Simply put, Allianz and other weather-related risk management coverage products use independent weather data to create indices for a variety of possible projections. Not all events triggering payments will involve physical damage.

The company says the weather risk management concept is more rooted in the U.S. than in Europe, where the annual impact could be around $561 billion, and other regions, to date. Agriculture (not surprisingly), energy and retail companies are finding that coverage can help them address fluctuating conditions, especially when they threaten seasonal revenues.

“Weather will increasingly be viewed as a core risk to business performance,” Karsten Berlage, global head of weather risk management at Allianz Risk Transfer (ART), notes.