Weather risk management in retail

Daily news mass media readily inform people about numerous natural disasters happening throughout the world. Such extreme weather conditions as floods in India and Louisiana, severe drought in California paralyze the life of entire states and have a harmful impact on the economy.

According to Allianz Global Corporate & Specialty SE reports, only during the last three years insurers around the world paid $70 billion a year for claims related to extreme natural phenomena. In the 1980s the annual amount of payments for such claims consisted only $15 billion. By comparison, 905 natural disasters took place around the world in 2012, 93% of which were weather related ones, and they led to losses in the amount of $170 billion.

However, also less devastating in its power weather conditions have a strong impact on the economy. Furthermore, the losses emerging due to weather changes exceed the annual losses from natural disasters significantly. Even small deviations from the expected weather conditions can greatly affect the financial situation in various industries.

Retail industry is highly susceptible to risk of unstable weather. Abrupt change in the ordinary climatic conditions, such as sharp cooling or warming often turns for business into bigger losses than ones from the most serious natural disasters. For instance, an unusually mild winter provokes a drop in demand for warm clothing, and vice versa in cold summers demand for beach accessories and refreshments also falls. Excessive precipitation during weekends can result in people’s reluctance to leave their houses. Sudden pressure fluctuations negatively influence the well-being of customers who are weather dependent, and this fact can greatly affect the attendance of shops and shopping centers even in visually good weather.

Nowadays there exist solutions for weather risk management which can protect retailing companies from revenue fall in various cases when shopping centers are empty due to bad weather or in situations when demand for seasonal items is different from expected. The fact is that over the past few years the availability of weather data has increased significantly. Processing of huge amounts of data does not take a lot of time and has become much cheaper. Moreover, in modern conditions one can measure and analyze not only the basic weather parameters such as temperature, humidity, wind force and wind direction, but also intensity of rain, sunshine or snowfall. 

Modern technologies allow getting information on the current weather and providing accurate forecast not only for cities, but also for a specified place worldwide. Comparing the historical weather data with the statistics of growth and decline in demand for certain products, it is possible to anticipate the consumer involvement and to hedge weather risks in advance. Weather risk management gives opportunity for companies to perform their strategies such as diversification and adaptation of production for expected weather conditions.