Impact of Volatile Weather on Businesses’ Profits is Increasing

Insurer payouts for weather-related catastrophes rose from $15 billion a year between 1980 and 1989 to a staggering $70 billion annually between 2010 and 2013.

In a new report ‘The Weather Business – How companies can protect against increasing weather volatility’, which focuses on the growing importance of weather risks for businesses, industrial insurer Allianz Global Corporate & Specialty SE (AGCS) highlights the economic impact of fluctuating weather conditions and how companies can protect themselves, using new approaches to ‘weather risk management’.

According to the report, the economic impact of increasing everyday weather volatility far exceeds the already huge sums annually associated with natural catastrophes. AGCS estimates that the impact of routine weather variation on the European Union’s economy could total as much as €406bn (£346 billion /$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[2]. And what’s more, the direct cost of weather volatility around the world is increasing significantly. According to Allianz, insurers have paid out US$70 billion globally for damages from extreme weather events every year for the last three years alone. Back in the 1980s, “only” US$15 billion a year was paid out for such claims.

In many countries, retail is one sector which is heavily exposed to poor weather, especially in the all-important pre-Christmas period when retail footfall traditionally increases significantly. Other sectors which can be badly affected include the agri-food industry, construction, distribution, energy, tourism and transportation, the report says.

Despite these losses, many 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, it notes.

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, which enable companies to hedge this risk, similar to the way they might do with interest rate movements and foreign currency exchange rates.