The tools of weather risk transfer are derived from indices and outlooks based on historical weather patterns. Global warming could change weather patterns irrevocably, making historical data, well, history. Will that leave users of those tools on thin ice? No, says Warren Isom, senior vice president at Willis Re Inc. Instead, proper use of weather risk transfer tools allow risk managers to handle just the sort of volatility associated with today's changing climate.
"Volatility has become an increasingly major focus of buyers and sellers in the weather market, and it is one of the means of measuring uncertainty," Isom wrote in an e-mail interview.
People dealing in weather risk measure this uncertainty and use it to weigh their analysis of historical weather patterns, he said. Risk-takers adjust their spreads and pricing based on this volatility and the uncertainty wrought by changing weather patterns.
Another reason that the long-term effects of global warming won't affect the efficacy of weather risk management activities--risk-takers only assume risk in a three- to five-year time frame, generally speaking, in more standard contracts such as those based on temperature and precipitation, according to Isom.
"They do not expose themselves to the 30- to 50-year time frames within which much of the discussion of climate change takes place," Isom said.
The broker also serves on the board of directors of the Weather Risk Management Association as secretary and treasurer.
What it comes down to is that weather risk management tools--whether they be some form of insurance or a financial instrument--are valuable because they're basically made to help risk managers reign in the unpredictability of weather, he said. And so they will only become more valuable if climate change accelerates.
"We expect that the transfer of weather risk," Isom wrote, "will become more widespread as the impact of weather's uncertainty ... exposes firms, governments and other organizations to lost revenue, unexpected costs and increased pressure on capital."
June 1, 2007
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