Everybody complains about the weather – but, now, more companies are doing something about it.

The weather risk industry represents a $32-billion a year market, according to a recent survey by the Weather Risk Management Association and PricewaterhouseCoopers. I’ll briefly discuss how it works and what industries it applies to. Why is “WRM” used? Because, says Weather Risk Management Association President Martin Malinow, “weather risk management will protect the bottom line.”

As Malinow explains it, weather risk management is the mitigation of financial risk triggered by the weather. “Financial weather risk occurs when a weather event or variations of a measurable weather index – temperature, rainfall, etc. – causes losses to either property or profits for an individual, government, or corporation,” Malinow noted. “A large percentage of the world economy feels the financial impact of Mother Nature and can now respond proactively by using weather risk management tools. These financial instruments allow businesses in many sectors to mitigate the effect of weather on the bottom line.”

WRM tools include (re)insurance, futures, or derivatives to design a weather hedge, which is essentially a four-step process:

• Identify the significant business exposure to weather;

• Quantify the impact of adverse weather on business;

• Structure a weather risk contract that pays when adverse weather events occur; and

• Execute the contract in the best possible form to address the business concerns.

A wide range of industries can benefit from WRM, according to Malinow, including (among others):

• Agriculture (risks: crop yield, handling, storage, pests);

• Construction (delays, incentive/disincentive clauses);

• Energy (reduced and/or excessive demand);

• Entertainment (postponements, reduced attendance);

• Governments (budget overruns);

• Insurance (increased claims, premium diversification);

• Manufacturing (reduced demand, increased raw material costs);

• Retail (reduced demand for weather-sensitive products); and

• Transportation (budget overruns, delays)

“It’s time for corporations to stop complaining about the weather and take proactive steps to mitigate potential damage to the bottom line,” adds Malinow. “Shareholders and financial analysts should be demanding that companies add weather hedging products to the financial risk management toolkit. Any fiscally responsible company will have such a toolbox and will use it to protect shareholders’ investments.” ###