Water, water everywhere
In a world that is increasingly global, increasingly connected, increasingly digital…one thing (ok two things…but I’ll get to that) crosses cultural and geographic divides and is a common point of interest for young and old, rich and poor; independent of nationality or education, the weather is universal. I don’t know that any official statistics exist to this effect, but I would wager that the weather is the single most talked about thing in the world. Following closely after ‘How are you?’ in almost any conversation comes ‘So how about this [heat, cold, snow, rain, fog, wind, etc.]?’ – it is the world champion subject of small talk and speculation.
In the United Kingdom, it goes even further, it is a defining trait of Mr. Brown’s beloved ‘Britishness’ to live and breathe ‘the weather’. And just in case you have any doubts, have a look at what our friends at Google can tell us. Well firstly, when you look at the global frequency of searches you immediately see the two truly common global threads:
“Sex” (red) tops the list, followed by “Weather” (blue), “Football” (orange), “Business” (green) and lagging far behind “Politics” (purple).
It is however important to note that whereas “Sex” and “Football” are identical in many languages, “weather” is unique to english language searches, and so its relative importance is certainly underestimated by this graph. Furthermore if we look at national differences, we find that the UK is the only country where “Weather” is a more popular search term than “Sex”! And for good measure, “Football” runs a very close third! (For some unknown reason, I can’t seem to get screen grab images I’ve saved to appear…very frustrating…just spent an hour trying to get it to work – is it a problem with ‘Grab’? or converting .tiff files to .jpg? aaarghh! Well you’ll just have to follow the links to see what I’m talking about…sorry) Only Seattle breaks into the Anglo-Canadian monopoly of the Top 10 cities ranked by popularity of “Weather” as a search term (and its starting to be pretty obvious where I’m coming from with my own ‘weather’ fixation…;) ):
1. Thames Ditton, United Kingdom
2. Calgary, Canada
3. London, United Kingdom
4. Bletchley, United Kingdom
5. Halifax, Canada
6. Edmonton, Canada
7. Brentford, United Kingdom
8. Vancouver, Canada
9. Seattle, WA, USA
10. Sheffield, United Kingdom
Looking at the trends for just the United Kingdom – we (mostly) get rid of the language bias, and we can see “Weather” clearly and consistently on top, with periodic spikes driven by unusual or extreme weather:
And can anyone tell me what exactly is going on in Inverness and St. Albans? Also interesting to see the Celtic priorities…
But it’s not just an ‘anglo-saxon’ thing, the French also seem to obsess over la “Meteo” (so I guess the apocryphal latin lover checks to see if it is raining before making his move…):
The UK headlines have been dominated this spring with weather related stories – the very hot April, the cold cold May and the wet wet wet June that brought floods and destruction, especially in the Midlands:
Insurance claims from the recent devastating floods are expected to reach £1.5bn, an industry group said today.
The news came as Gordon Brown promised extra government help for the affected areas.
An assessment of claims made so far, extrapolated to cover all flood-affected areas, gave a total 50% higher than the £1bn estimated a week ago, the Chartered Institute of Loss Adjusters said.
There have so far been 27,500 domestic claims with an average value of £30,000 and 6,800 claims from businesses averaging £100,000, the organisation said.
I am inclined to think that a more dynamic management of weather related risks – particularly by businesses and perhaps by local governments – would mitigate the negative economic impact of events such as these recent floods. Clearly their is a basis risk between rainfall and flood damage, but one would suspect that it is (or can be) reasonably well understood and algorithms could be developed (by say insurance companies or government agencies) to articulate an efficient hedging strategy. Whereas I suspect an individual homeowner would generally be better served by a ladder of digital weather derivatives (no claims process, lower premiums, more transparent pricing) than a typical flood insurance policy (if one is even available), I am happy to concede that we are probably some way off from Joe Public feeling comfortable with such a derivatives based insurance strategy (although I would bet it happens sooner that most would think…ie years not decades.) However, there should be nothing to stop businesses (big and small) and possibly government (especially local authorities who bear the brunt of disaster relief) from adopting such risk management strategies immediately. The benefits should be obvious:
(from the “Repair bill rises as waters recede” Financial Times, July 7, 2007)
…Such increases are not unusual with flood claims, according to Robert Muir-Wood, chief research officer at Risk Management Solutions, the commercial modelling company. “You have a hurricane, and almost all the loss is caused at the time of the hurricane, and its just a matter of repairing the damage. But a flood, in a sense, keeps causing [damage].”When parts of the country were still under water, loss adjusters will not have been able to gain full access to all damaged properties.
A further uncertainty is that unlike previous UK flooding incidents, which have primarily affected residential property, recent events have hit industrial and commercial buildings. Some may have business interruption insurance that pays out if companies are unable to trade: claims are notoriously costly and can take time to reach the insurers.
To help businesses through their difficulties, Yorkshire Forward has revived a scheme first used to help countryside businesses get over the foot and mouth epidemic. It will provide grants of up to £2,500 for those employing up to 250 people that can be used to tide them over.
“The money can be used to restore power, buy a couple of laptops to reconnect to the internet, acquire a pump or employ extra temporary labour. We have made £1m available, and would increase this if necessary.”
Indeed from these examples, it seems to me that the immediacy and certainty of event-driven payout would be a more effective hedging mechanism in many instances than traditional loss-based insurance. And of course, weather derivatives have no real competition from traditional insurance products in terms of mitigating the business risks of adverse weather. For instance, the retail sector is much in the business news as it starts to report second quarter numbers hard hit by the cold, wet weather:
(from the FT) “Depressing mixture of weather and rates” …The wettest June on record has poured cold water on this summer’s fashion ranges and left clothing retailer morose as they ponder the fall-out of their worst season in at least five years.
(from the BBC)“Wet weather hits retail sales” …The ONS figures showed that supermarkets were hit particularly hard as food sales fell 1.1% in June because customers turned away from summer products as the rain and wind made barbecues and picnics less than appealing.
So what am I getting at? Well I guess I’m just saying I think there is a real opportunity for companies like WeatherBill to address this enormous potential market and why I’m excited to be involved with David and his team. Yes the weather is unpredictable. And its not going away! (…so you had better hedge it!)
