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The Perils of Ignoring Mother Nature

Experts say utilities' inconsistent approach to weather risk is costing them dearly.
Fortnightly Magazine - May 15 2002

perfect "other side" for hedging weather, since a warm winter that is disastrous for energy company revenues is a boon for the construction industry.

Tobben agrees that weather risk is seeing a move beyond the energy industry. "It's nothing new," he says, "but we've seen large transactions come in from the construction sector, from the agriculture sector, and through our partnership with International Finance Corp., we've seen a tremendous amount of interest for weather coverage in emerging markets." In emerging markets, he says, it is very difficult to obtain insurance, with the recent hardening of the insurance market, so companies are turning to coverage through the weather market for alternate sources of capital and risk management products.

Tobben even predicts that past growth trends could speed up in the next three to four years. "If anything, I might envision a bit of acceleration, because of all the business we're beginning to see in Europe, in Asia, in Australia, even Africa and South America." He acknowledges that "yes, they are significant growth rates, but you've got to realize just as the numbers are going up, probably the participants are going up at a similar rate as well."

Perhaps Caifa said it best: "Unless the weather just turns out to be normal for the next 10 to 15 years, and everyone is just content with it, I see no reason why you wouldn't want to hedge that risk, because it's there and it's volatile."

Although there are many positives in the industry at the moment, it is still fundamentally a very young industry. Tobben says that he wouldn't necessarily characterize the industry as still being in its infancy, but "I'd say we're starting to walk."

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