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"Corporate America has a new, keen focus on risk management. Unfortunately, it also suffers from a blind spot," said Jarvis Cromwell, chief marketing officer of Storm Exchange Inc.

Cromwell was presenting findings from a recent weather risk management survey by his firm and CME Group at the Weather Risk Management Association's 10th annual meeting in Miami Beach, Fla., in June.

That aforementioned "blind spot"? Weather.

"There's a lot of risk on the table, and some of these people are operating blind," he said to the 100 or so WRMA attendees, an audience made up of insurers, traders, brokers and meteorologists, among others.

Contributors to the problem could be a corporate culture that gets in the way of weather risk management, a belief system that holds that weather must be lived with, or a simple lack of awareness that tools do exist to hedge and mitigate some of the costs of fluctuating temperatures and precipitation.

Perhaps the sector that best typifies this attitude is retail, according to the Storm Exchange/CME survey. Retail companies made up one-third--the greatest proportion--of survey respondents Cromwell called "weather deniers," those who don't believe that weather affects their operations.

Only 28 percent of the retail respondents were found to have tried to quantify their weather risk, versus 67 percent in the energy sector.

It would seem that retail is not alone, though, in failing to grapple with weather as perhaps it should. The agricultural industry made up the greatest proportion of respondent categories that Cromwell referred to as "worried but mystified" and "weather conflicted." And only one in four agricultural companies said they have tried to quantify their weather risk.

Yet this sector is trying. Ag respondents scored the highest for their concern about weather.

So what was the moral of this survey, and a primary message coming out of the WRMA meeting in Miami? Corporations need to become more aware of the expanding arsenal of weather risk management tools available. They might learn to like them once they use them.

As demonstrated by the survey, only one in 10 respondents had used weather derivatives, but of those, 86 percent found them useful.

Weather derivatives and insurance products that make up the weather market are risk transfer products based on indices created from weather measurements, such as on temperature, rainfall, wind speed, daylight hours and humidity. Over-the-counter products, the shorthand for which is OTC, can be fashioned to tackle specific problems for end users, or derivative futures based on weather can be traded on the CME.

With or without mass corporate consumption, this weather market continues to expand. The annual PricewaterhouseCoopers analysis of the weather derivative market, conducted in conjunction with WRMA, revealed that trades at the Chicago Mercantile Exchange increased by 35 percent last year.

Felix Carabello, director of alternative investments at the Chicago Mercantile Exchange, stated that the CME's goal during the next three to five years is to pursue end user (read "corporate") participation in the market, now that traders and investors are heavily involved. Carabello sees a $200 billion market that CME is hoping to "harvest."

August 1, 2008

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