Weather Insurance a Hot Commodity After Rough Winter

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by Amy O'Connor

Almost every business, in one way or another, is affected by weather, says Christian Phillips, contingency underwriter for Beazley. And as extreme and unpredictable weather continues to disrupt businesses and bring big losses to the insurance industry, underwriters have stepped up their efforts in finding viable products to help mitigate exposures. In this Q&A with, Phillips discusses Beazley’s expansion of its Weather Guard product to the U.S. and how the severe winter weather this year is driving demand for weather insurance options.

MyNewMarkets (MNM):  What are some of the business risks of extreme weather?

Phillips:  Almost every business, I would say, is affected by weather. The big story, obviously, what you’ve seen in the press lately. There’s been a tremendous cost of snowfall removal.

A typical example is management companies, schools, hospitals, residential areas providing snow removal services for a set budget, but then they find themselves with increased costs as they buy more salt and grit and pay additional overtime due to the above‑average snowfalls for the season.

Another major story is the cancellation of all the flights due to the bad weather. Obviously, this has been a major challenge for a lot of our event organizers. We’ve seen this winter thousands of flights canceled across the U.S. due to snow and ice storms…With all these cancellations, there’s increased risk of people that are prevented from getting to the event….Which results into refunds of ticket sales. Sponsors may even be looking for some of their money back.

Obviously, the focus right now is snow, but we will be moving into the spring and the summer. This could affect revenues of golf courses…this is the biggest revenue period, during the summer months. If a course has to close more often than usual, people will stay away because they’re fed up with wet conditions. It could be a deciding factor between the course making or losing a profit for that year.

These are just, obviously, a few examples of businesses and risks of extreme weather, but it is very widespread. As I mentioned earlier, almost every business is affected in some way from the weather extremes.

MNM:  How does Beazley’s Weather Guard Insurance address some of these issues?

Phillips: There are three separate covers that we broke out under the Weather Guard policies. First is the most traditional one, which is adverse weather.

Beazley provides adverse‑weather coverage for sporting events, the entertainment world, and the conference and trade‑show industry. We get involved with all‑size events, from school fetes and fairs, right through to the large and the biggest events, the Olympics and World Cups.

The second coverage under the Weather Guard is what we call income stabilization. A study found that over 70 percent of businesses’ income is affected by extreme weather. Income stabilization is of particular interest to companies with those incomes that is directly impacted by weather, such as resorts, and even more for businesses that are only open for part of the year. An example of that would be a water park or a theme park.

Then the final tier heading of coverage underneath the product is cost containment. This is that the higher‑than‑average snowfall accumulation that can be extremely costly to businesses, purely because they have to buy additional salt, grit, the manpower required, and this has made costs increase dramatically for property owners. The Beazley cost‑containment product will prevent these expenses spiraling out of control.

MNM:  What has been the response to Weather Guard insurance since you launched it in the U.S.?

Phillips:  The response, I would certainly say, has been extremely high this year. I think that’s due to the volatility of the weather conditions that we’ve seen.

I think, in addition to that, it’s been due to the marketing, the educational side of things – letting our brokers know that this product is out there, and also letting our insureds know, via the brokers, that this product can be purchased. Certainly, from our perspective, we’ve seen five to 10‑fold number of inquiries.

MNM:  How would you compare that to the business that you see in the U.K.?

Phillips:  Weather Guard was launched in the U.K. a number of years ago… off the back of two really, extremely bad, wet summers that literally were crippling some of those businesses that I mentioned earlier are very seasonal, whether it be a golf course or whether it be a theme park, zoos…most their revenue is derived during those summer months, literally to the point that it was making various different companies go bankrupt.

We then looked at that and were approached…on the golf side. That’s where it really all stemmed from. A number of the golf courses went into receivership, and we then put this product together to, obviously, smooth out their balance sheets due to extremely bad weather. Right now, the U.K. is pretty much in the same place.

MNM:  What are some of the other coverage options that are available in the marketplace to handle extreme weather situations? Is there anything else like Weather Guard? Are business interruption or business income coverages similar?

Phillips:  There are a couple of other markets out there offering weather products…Whichever way you look at it, it is a business interruption, which, what we’ve always given is a business interruption cover under our general event cancellation policy. The reason we tailored out Weather Guard is really to try and adapt the product to fit other lines of business, because generally we were giving adverse weather for business interruption for the sporting events, the theater events.

This is going slightly different because they were one‑off events, whereas now we’re looking to give seasonal‑type cover for golf courses or theme parks, or even snow removal, as I mentioned earlier, for various different management companies.

MNM:  Has capacity in the weather insurance market changed in the last year or so, and do you expect that after this year that could continue changing?

Phillips:  I don’t believe the capacity’s probably changed over the last six months. I think it’s a bit too early to tell. I think it will be interesting to see what develops once all the claims have come in over the next couple of months.The capacity does vary from risk to risk. Much of that is very dependent on the volatility of the risk. Obviously, certain events are a lot more resilient to weather than others.

The capacity on those that are very resilient, I would say there’s a lot of it. It’s in abundance, and we get a lot of support, as I mentioned earlier, from other markets, to provide that. I think it becomes more challenging for those events that, let’s say, are not in such a favorable time of year and/or location.

MNM:  Does a lot of the underwriting have to do with locations or geography as well?

Phillips:  Absolutely. It does depend very much on where the event is taking place, particularly because, again, if you’re in the East Coast or Midwest, certainly during the winter periods, you’re more susceptible for snowstorms, ice storms, et cetera, whereas in California, [laughs] it’s very remote.

Then, saying that, we also have a different variant of risk in those locations, because we have bush fires that are created by extreme heat, that can create smog, that can become dangerous, certainly, for outdoor sporting events, whether it be marathons, running events. It could even shut down airports because of that. All of it is really coming from the weather. There’s different extremes and different types of weather perils depending on the different locations.

MNM:  How do you think this year will affect demand or pricing for weather insurance, if at all?

Phillips:  I certainly think demand has increased tremendously over the last 12 months, due to probably the snowstorms that we’ve seen, the heavy downpours during the summer…I know we had a number of events in New York and places like that that were affected from flash floods.

Also, as I mentioned a minute ago, the soaring temperatures.I think Death Valley this year, in June, recorded the highest‑ever temperature for June. I think I might be right in saying anywhere on the planet for the month of June.

Again, they all come, and they all give different dynamics that we have to underwrite. I think the past year’s weather data will need to be added to our historical data that we currently hold, and then our models will be rerun. And obviously, that will reflect whether there is any change in premiums and, generally, whether geographically there’s change in premiums.

We also look at what’s also happening out there. You’ve got the polar vortex there at the moment. The snow caps are melting, so you have got sea temperatures rising up at the North Pole, which is then pushing colder air down…There’s no indication it’s going to change right now, so I think if anything we’re going to see more increased extreme weather conditions.

To hear more from the interview with Christian Phillips, please listen to the podcast below:

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