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Protecting against the hidden costs of ‘normal’ weather

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Despite these losses, many UK 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.

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.

“However ‘bad’ the weather is, it is no longer a good excuse for disappointing earnings,” explains 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.”

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.