Weather and Risk Management

Weather has always played a part in risk management. In the last few years there has been an increasing interest by management in assessing the impact of weather on their company's performance. Statements like "…lower profit than expected due to warm winter…." have become common occurrences in UK and Europe.

The degree to which adverse weather conditions affect business can be expressed as its weather sensitivity. By understanding the linkage between weather and it performance, business can take appropriate steps to offset its weather risk.

Weather derivatives give business the opportunity to manage its exposure to weather risks in two ways. Firstly a business can identify its risk to severe weather events that would adversely impact on its revenue streams and arrange suitable protection. Secondly a business can try to protect against a variation in its revenue projection arising from weather events, whilst not severe, deviate from the norm.

The UK Met Office can offer historical records of weather coupled with ongoing updates and supported by reliable weather forecasts. Risk analysis comparing weather data with business production can help provide a reliable indicator of what kind of weather has the greatest impact on the business. These in conjunction with strong meteorological expertise and long experience in providing services to the commercial markets, gives the Met Office the ability to play a leading role in supporting the weather derivative market in the UK and Europe.