You can't control the weather--but you can manage the business risks associated with it. Five years ago, Lynda Clemmons and her colleagues pioneered the first weather-option trades and popularized the concept of risk management for weather. The industry is now a $7.5 billion worldwide market. In 2001, Element Re managed some $800 million in weather risk.
President and COO, Element Re Capital Products Inc.
FROM LYNDA'S ORIGINAL ENTRY:
What is the big idea?
To find a way for businesses to protect themselves from the money they lose due to non-catastrophic weather like heat, cold, rain and snow. In 1997, we pioneered the first weather option trades and methodologies, shepherding this industry out of its infancy. We founded Element Re in 2000 in order to expand the scope of the market by offering insurance, making weather risk management more universally acceptable. By March 2001, the weather risk management industry had grown into a $7.5 billion worldwide market.
What was your creative spark?
Over 70 percent of businesses in the U.S. are exposed to financial weather risk. The U.S. Department of Commerce estimated that exposure to be in the neighborhood of $1 trillion per year--about one eighth of the total Gross Domestic Product. Companies used to leave their financial fortunes to chance and simply hope for the best. We saw an opportunity to create a service that could help businesses get a grip on a risk that was historically viewed as uncontrollable. While the drama and singular destructiveness of catastrophic events like tornadoes, hurricanes and floods capture the public's attention, it's the more commonplace weather patterns of heat, cold, rain and snow that cause the most pervasive financial damage.
Why is the idea so compelling?
Because there is hardly a company in the world that isn't somehow affected by non-catastrophic weather. There is the beverage manufacturer that loses money because of an unseasonably cool summer when customers buy less of their product. Or the coat manufacturer or ski lodge that loses business because of a warm winter. Or a lettuce farmer who depends on cool temperatures in the spring and summer for the crop to grow. Or a hydroelectric generating company that has significantly less capacity due to dry weather and lower stream flows. The examples of how weather risk management can be used are basically as diverse as the businesses that are out there.
How or why did the idea spread?
The idea began to spread as shareholders, boards, analysts and financial executives began to see that losing money because of bad weather could be prevented. Companies are beginning to understand that not hedging this risk is, in essence, gambling. And at some point their luck will run out. Our introduction of insurance into the market made it much easier for companies to understand and manage their weather risk. And so far so good--since we founded Element Re in July 2000 with five employees, we've grown into a 22-member team managing over $800 million in weather risk in 2001.