Weather patterns are becoming more unpredictable than ever. In March 2012 the UK was in the grip of a hosepipe ban, but within one month we had received 200% more rain than usual, resulting in 2012 being the wettest year in England on record.
While the consequences of severe weather events are often insured, seasonal fluctuations in climatic conditions are not. This can be a real headache for retailers, particularly in the UK where we are not generally used to coping with unseasonal freezing temperatures or heat waves.
Weather has a strong impact on consumer behaviours and buying patterns, and can heavily influence the demand for different products and services. This can affect a company’s financial performance as much as, if not more than, damage from high profile flood or windstorm events. A clear example of this would be the 600% increase in sales of sledges witnessed by Amazon during the cold snap in January earlier this year, but on the flip-side, a prolonged period of wet weather or heavy snowfall can put consumers off visiting the high-street or prevent them visiting stores altogether. This means retailers see sales drop off dramatically and overall revenues are seriously affected, particularly if the disruption occurs at a busy trading period like the run-up to Christmas.
So what can be done to support retailers and their increasing exposures to unpredictable weather patterns? The good news is, the insurance industry is responding.
Weather risk coverage is essentially a hedging mechanism. It is a consultative and very analytical process. There are an increasing number of products and solutions available such as ‘adverse season/day’ or ‘promotional’ covers.
As a general rule however, weather solutions are bespoke, specifically designed to meet risk management objectives of each client. They are typically insurance or financial contracts in derivative form, triggered by movements in a weather index above or below a pre-agreed level, with no physical damage being required for a payment to be made.
Programmes have been devised to respond to temperature, rainfall, wind, snow and sunshine, but as long as credible data exists, it can be used to create an index and structure a solution against any weather event. With the sources of this type of data being made more readily available for commercial use from meteorological stations and satellites, the opportunities to innovate are potentially boundless.
Recent statistics show that around US$11billion worth of weather risk solutions are now being traded annually. The fact that this market is growing can only be good news for retailers; there will be an increasing number of products available to help them protect their profits when the weather turns against them.