While it’s impossible to control the weather, the increased availability of weather risk cover means companies can now control the impact it has on their bottom line.
With no shortage of fluctuating weather in Australia, from the extremes of floods, bush fires and cyclones, down to rising temperatures in summer, most businesses are affected to some degree by their exposure to weather. Weather Risk Cover not only insures a company against financial losses, but can also be used as an innovative promotional and sales-boosting tool.
Beazley Contingency Underwriter Al Dart says over time weather risk products have evolved and as a result now cover a broader spread of scenarios in addition to defined weather triggers. “Going back 10 to 20 years there was an expectation that weather risk cover was limited and expensive, which it used to be,” Dart says. “Today coverage is far more tailored and backed by a much richer wealth of data.”
Weather Risk Cover not only insures a company against financial losses, but can also be used as an innovative promotional and sales-boosting tool.
Beazley offers two main products in the line – Pluvious cover and Cancellation and Abandonment.
Beazley draws on data from more than 5500 weather stations around the world to tailor their policies. The hourly data retrieved from these stations is turned into meaningful underwriting information that allows Beazley to assess risks on a particular day, at a particular time, over a particular amount of hours.
As long as there is a specific trigger and correlating data available at that particular location, Dart says Beazley are able to underwrite any peril associated with precipitation, temperature or wind speed. Cancellation and Abandonment cover is used if something dangerous or impossible forces a company to cancel an event. “For a V8 race, dangerous would have to be catastrophic weather, but for a runway show, light rain or drizzle would make it dangerous for those participating in the show,” Dart says.
Pluvious products are most commonly embraced by event hosts, or by ad agencies or companies who run commercial shoots. For example, a client may be hosting an afternoon game of cricket and want to protect themselves from a drop in ticket revenue if it rains in the morning.
We can calculate that five millimetres of rain between eight and 10 in the morning will equate to a $20,000 drop in ticket revenue and then we write a policy for that.
“We can calculate that five millimetres of rain between eight and 10 in the morning will equate to a $20,000 drop in ticket revenue and then we write a policy for that,” Dart says. The product can also be used for protecting expenses and stabilising income. “If you have a particularly hot day and your air-conditioning costs increase or a particularly cold month and your ice-cream sales decrease, Pluvious can be used as well,” Dart says.
On stable ground
Specialist underwriting group Allianz Risk Transfer (ART) offers a similar weather index insurance policy, which is triggered if certain weather events reach a particular pre-determined level. The General Manager of Allianz Global Corporate and Specialty Pacific, Holger Schaeffer, says: “Unlike traditional insurance, weather index insurance payments are made if the policy is triggered, regardless of whether loss or damage actually occurs.”
The most common adopters of weather protection are companies in the energy and agriculture industries. Other sectors in Australia that are sensitive to weather include alternative energy, mining, transportation, retail and construction. “Weather protection offers these companies the benefit of stabilised earning, better budgeting and liquidity, and an improved credit standing,” Schaeffer says.
What is innovative about weather risk products is that even companies who may not be exposed to risks in terms of supply, demand or operations are able to utilise the cover for promotional purposes. For example, to bolster sales a convertible car manufacturer could run a promotion that stipulates that if the temperature doesn’t reach a certain level the following month, all customers receive free servicing. “With so much competition, people have to be smarter in the way they promote their products or events,” Beazley Underwriter Al Dart says. “The answer to this is to attract people through weather triggers by offering a free product if it gets to a certain temperature between a certain time.”
Despite being a relatively new product offering, Schaeffer says alternative weather risk products are easy to understand. “This means any broker with some knowledge and a bit of enthusiasm is able to engage in a discussion with their client on the innovative products.” Schaeffer adds that it is essential that they do, as many companies that would significantly benefit from the products aren’t currently aware they exist.
“This is where brokers can contribute in spreading the word and educating their clients,” Schaeffer says. Dart goes a step further and says that with the rising
incidence of adverse weather in Australia, brokers can’t afford not to discuss weather risk cover with their clients.
“In terms of starting the conversation, it’s as simple as brokers asking the question and suggesting their clients get a quote,” Schaeffer says. “If they don’t, it could very well be a professional indemnity issue for brokers.”
Betting on the weather
Beazley implemented a policy for a client hosting a charity event that covered them for the cost of giving out a free product if the temperature rose to a certain point at a certain time. The policy was specifically designed to attract new sponsors to the event. Originally the organisation planned to run an envelope pick promotion, where one name was selected out of every 100 who attended. “That’s fantastic for the one person who wins, but what it wasn’t going to do was attract new people to the event,” Dart says. “The tailoring of the temperature clock attracted new people and new sponsors, by far enriching the clients overall gain from the event.”
Staying cool in a heatwave
Allianz Risk Transfer constructed a policy for a retail electricity utility to protect against the occurrence of heat waves coincident with electricity price spikes in Victoria, Queensland, NSW and SA. The index was based on the daily maximum temperature between November to March. Payment are made if the daily maximum temperature and electricity price exceed specified thresholds at particular locations. The strike level is a function of electricity price and exposed demand volume in megawatts, with a limit of cover of $75 million.
A mine-sized umbrella
An Allianz Risk Transfer solution was designed to address the impact of excessive seasonal rainfall on a company’s coal mining operations in Mackay, Clermont and Moura in Queensland. The index used was the weighted average of annual cumulative rainfall (ACR) at specified locations over a 12-month period. If the ACR exceeds a ‘strike’ level of 1416 mm the company would receive a payment. Under the arrangement, the company would receive $125,000 for every millimetre of precipitation above the strike level up to a total of $50 million.