Weather risk

Author: Dan Tomlinson, Managing Director, Allianz Risk Transfer

Every romantic wants to see snow on Christmas morning. However every retailer’s greatest fear during the Yuletide festivities is watching the snow fall, and the high street slowly empty of rampaging shoppers.

Andy Street, CEO of John Lewis, in an interview with the Evening Standard this month, described how he lives in a constant state of dread during December, worrying that snow could hit the first Saturday of the month and cost him millions. He only wants to see snow on the roof of his cottage in Wales on Christmas Eve, once the shop doors have closed, and he has collected an estimated £600m in revenue.

From John Lewis right down to the small toy shop on the village high street, weather volatility is the greatest threat to retailers and suppliers during this time of the year. A recent study by Allianz Global Corporate & Specialty (AGCS) has highlighted the overall economic impact of fluctuating weather conditions. To put this into context, the economic impact of increasing ‘routine’ weather changes could supersede the massive sums annually paid out for natural catastrophes such as the US hurricane Superstorm Sandy in 2012 that devastated New York and the Eastern Seaboard.

AGCS estimates that the impact of ‘everyday’ weather variation on the European Union’s economy could total as much as £346 billion (€406bn/$561bn) a year. As a comparison, during 2012, there were 905 natural catastrophes worldwide, 93% of which were weather-related disasters, costing US$170 billion.

In the UK, retail is heavily exposed to poor weather in the all-important pre-Christmas period when retail footfall traditionally increases by nearly 40% . The ‘big freeze’ of December 2010 knocked retail sales down by 1.4% , with retailers suffering their worst December on record. Already this year, 17 retailers and consumer goods companies blamed the rain and snow for their financial performance not being as good as expected.

However retailers and suppliers can protect themselves by managing the routine ‘risks’ that they face during the winter peak sales months. Weather risk management offers a new avenue for companies to respond to variable weather which can affect their business. Using independent weather data, these products are linked to actual fluctuations against pre-agreed weather patterns 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.

Weather risk management products are already popular in the US, where they have become more readily accepted as a standard feature of companies’ overall risk management. In the UK, and elsewhere in Europe, the product is still emerging, but is being used by a growing number of retailers to deploy increasingly sophisticated solutions to their business challenges.

Weather will increasingly be viewed as a core risk to business performance. So, demand for weather risk management solutions should grow significantly in the future with companies able to reap the benefits of better cash flow stability, more accurate budget management, greater earnings consistency and higher risk-adjusted returns.

Though retailers may not wish for a white Christmas too early, the fear of little bad weather might finally subside to be replaced by some festive cheer.

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