Weather risk management is identifying, understanding, and ultimately mitigating financial exposure to the weather/climate system.
Identify types of weather/climate phenomena that adversely impact an organization’s performance, governance, and/or strategy.
Educate key staff regarding the capabilities of modern weather/climate science and how these advancements can be leveraged to quantify financial exposures. It is at the intersection of economics and science where the optimal framework for strategic risk assessment can occur.
Mitigate weather/climate risks by using the knowledge and metrics obtained via identification and education.
Weather/climate-related risk reduction occurs in three forms:
Risk Transfer: Parametric weather index insurance, financial derivatives, and/or traditional indemnity (proof-of-loss) insurance products.
Avoidance: Utilization of active risk management strategies involving the application of forecast/decision making information to optimally realign/modify products and services (operational processes) in ways that remove or reduce weather/climate exposures.
Optimal Retention: Apply enhanced knowledge of weather/climate system to develop naturally offsetting/negatively correlated organic hedges/strategies (time, space, logistics, products, etc.) and/or take actions such as increasing weather/climate resilience through infrastructure/engineering products.
Importantly, the most effective risk management program likely includes a blend of all of the aforementioned mitigation pathways as each are complementary and culminates in the form of the weather risk management ecosystem.
Demand and price fluctuations can create very large financial exposures for Energy retailers who sell power and gas for domestic or industrial heating and cooling.
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