When it comes to a weather forecast,a business can generally take the information and use it to mitigate losses or determine whether or not to spend the money for a particular event. A weather forecast can help one make better decisions. In addition,many businesses are also affected by what happens during a season. A warmer than normal winter or a cooler than normal summer can impact all sorts of companies like utilities,food and agricultural groups and even retailers - these are simply a start to a long list of sectors whose revenues,costs and financial performance are sensitive to weather. An interesting insurance product in this regard is index-based insurance. Weather indexed risk products represent a newly developed alternative to the traditional crop insurance programmes for farmers in the emerging markets. These products are based on local weather indices and ideally highly correlated to local yields. Indemnifications are not triggered by actual yields but instead by pre-specified patterns of the index. This reduces the typical risks and difficulties linked to traditional insurance products such as moral hazards,adverse selection,or the need for field visits. One of the biggest benefits is that the insurance is based on a reliable and independently verifiable index and thus can be re-insured,allowing insurance companies to transfer part of their risk efficiently to international markets. Once thought of as solely for agriculture,weather insurance is gradually used by almost every type of business outdoor events,power generating units,manufacturers,construction and most other industries to minimize the financial impact of weather on their operations. Unlike regular insurance,which would only cover physical damage,weather insurance protects against additional expenses or loss of profit stemming from a specific weather event. The entertainment industry is emerging as one of the most frequent purchaser of weather insurance. Fair,festival and concert organizers/ promoters have a limited opportunity for their events and need protection against the most uncontrollable aspect,the weather. It is interesting to note that the broadcaster of the Indian Premier League,multi screen media has reported to have taken an insurance cover against the possibility of bad weather disrupting matches during the fourth season of the T20 cricket league. The total cover value was estimated at around R 900 crore. Due to Indias climate vulnerability,risk transfer mechanisms like weather insurance clearly offer opportunities for weather sensitive businesses. So,if one is in the business,where the revenues are affected by the vagaries of weather,having an index-based insurance can be quite a respite. Author is ED,Vantage Insurance Brokers & Risk Advisors
