Whether it is due to too much rain or too little, temperatures that are too high or too low, too much or too little wind – certain weather phenomena have always been beneficial to some companies and detrimental to others. What has, however, changed is that we are now faced with extreme weather events that companies need to take out cover for to prevent financial losses. Karsten Berlage talks about how the climate solutions offered by Allianz Risk Transfer can help companies from a whole range of sectors to do just that.
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An increasing number of companies have recognized the risks of climate change. The last issue of the Allianz Risk Barometer claims that climate change is clearly the No. 1 long-term business risk for industrial customers. Leading short-term risks include sales interruptions and natural disasters, neither of which can be clearly separated from each other or from events induced by climate change.
As the world’s largest direct insurer, Allianz is directly affected by the consequences of extreme weather conditions such as drought, flooding, storms and heat waves. Since the 1980s, annual weather-related insurance claims have risen from an average of USD15 billion to more than USD70 billion.
Allianz Risk Transfer (ART) has established a team that develops risk solutions related to climate change. As more than 75% of businesses around the world are affected by climate change, our global team of specialists is available to address weather risk issues for our clients in almost any industry sector. The ART team primarily focuses on the agriculture and energy sectors. An increasing number of companies have identified climate-related issues as key risk factor, yet lack the analytical capacity to identify their exposures and the knowledge how to protect against these negative effects.
ART conducts thorough analyses of the client’s climate risks against the background of historical weather patterns and suggests tailored – often index-based – solutions that protect against unwanted precipitation, temperature or other weather perils. Data collections have become increasingly sophisticated with contributions from an elaborate network of local weather stations, satellites and synthetically created and modelled data.
In order to provide clients with the most comprehensive solutions, sometimes referred to as “all-risk-covers”, ART’s weather and agriculture experts team up with AGCS’ engineers and other industry experts in the areas of property or liability. Depending upon the regulatory environment, the risk solution is often provided by the local Allianz entity or a local network partner of Allianz Group.
In recent years, Europe has had a couple of rather mild but stormy winters, whereas North America experienced very cold and snowy conditions. These unexpected conditions cause problems for corporations. For example rain, snow or sudden temperature drops create chaotic conditions and serious financial repercussions whenever airport operations are restricted for days or longer. Weather can also generate less spectacular but – nonetheless – serious economic consequences for renewable energy producers whenever the wind fails to blow and wind turbines do not generate any or enough electricity.
Insurers like Allianz evaluate such new risks and cross-check the client’s revenues, expenditures and production data against weather data to calculate weather indices. For illustration, insurance policies pay claims under certain weather conditions to clients, protecting (for example) farmers in Germany, construction companies in the Netherlands, and electricity providers in Great Britain.
The consequences of climate change catapult many known risks into a new dimension. Therefore, it is becoming increasingly important for companies to acquire insurance coverage against delivery shortfalls in remote, but especially vulnerable regions, while also diversifying their supply chains to a greater degree; for example, when iron ore production declines in Brazil, the world’s second biggest producer, steel production may experience a standstill in various parts of the world, leading to grave consequences for the automotive industry, construction, and transportation companies.
Water stress represents a global risk with a growing impact according to the Global Risk Report (World Economic Forum). If the current water management does not improve, the consequences including financial losses will be severe. The challenges resulting from our dependency on water are real and many countries and industries are already struggling because of these negative effects. Water stress underscores the dependency of ecosystems and societies on water, i.e., water quality, quantity or scarcity and accessibility.
The recent arrival of El Nino will change water balances and will create more uncertainty and potential volatility in form of droughts and floods. Risks for companies include:
- Physical risks directly related to floods or droughts
- Reputational risks due to critical media coverage
- Community risks resulting in instable social environments due to degradation of local water resources
Allianz offers several products to address the risk of water stress, including (for example):
- Hydro Power Generation Insurance for hydro power plant operators or investors for lack of rain allowing to protect against less power generated than expected
- Construction & Building Insurance in form of an all-risk insurance for “green” technologies, such as waste water treatment, building materials, solid waste handling and transportation
- Crop Insurance for multiple perils (MPCI)
Over 75% of power generation in South America emanates from hydro power and due to ongoing drought conditions, the region has significant power issues that can impact the economy and trickle into other industry sectors. Specifically, power utilities are impacted since they rely solely on alternative and more expensive sources of power generation, if they generate insufficient hydro energy. In order to address this issue, ART’s climate team has teamed up with the Worldbank to offer lack of rain protection to a local power company, effectively protecting the financial impact of a drought.
Africa is another region that highly depends on regular precipitation as the region is primarily focused on agriculture and crop production, which are closely linked to rain. ART provided lack of rain covers in five countries to support the local agriculture industry. Data collection via satellite allows for precise monitoring and claims determination. The payouts of weather index solutions are fast and allow aid money to arrive very quickly. According to the African Risk Capacity, a dollar received in the affected regions right after the drought occurred is as effective as USD 4.10 that arrives later through the normal means of aid.
These examples illustrate how ART approaches the topic of water stress to mitigate adverse financial impacts caused by floods or droughts thereby also providing opportunities to invest in the clean water industry.
In recent years the emergence of wind farms and solar parks has contributed to a healthy energy mix. In order to encourage investments in alternative energy, some governments have provided subsidies, which resulted in increased construction of projects in regions with less wind and sun. As subsidies were reduced, the dependence on weather resources to operate economically increased.
Allianz offers several different solutions in the alternative energy sector, including:
- Lack of wind/sun cover protecting against insufficient power generation
- Reduction of volatility cover to protect wind farms when operation has to be halted if there is too much wind
- Excess wind cover during the construction phase of wind farms that can lead to construction delays and additional costs for labor, equipment rentals, and even penalty payments
- Excess wind protection for owners of clean energy certificates which loose value in case of high wind generation
These insurance solutions for the alternative energy sector allow companies better cash flow planning. Another important benefit is an improved creditworthiness and enhanced credit profile due to the fact that the main operating risk of a wind park is covered by an insurance solution provided by Allianz leading to improved financing terms.
In a typical case, Allianz analyzes historical wind data and the wind farm equipment, type of turbine, etc. at the site. A theoretical power curve is created and an insurance solution structured to optimize financial benefits for the client. In order to further reduce the basis risk of wind speed and power generation of these parametric solutions, Allianz offers indemnity covers that cover deviation of actual power generation.
ART’s weather experts and AGCS’ engineers teamed up to provide combined solutions providing “all-risk” covers to our clients, including possible equipment failures such as solar converters or wind turbines. These comprehensive insurance solutions in the alternative energy sector often span multiple years to match financing terms.
Crop insurance provides effective coverage against multiple perils including temperatures, precipitation, hail, pesticides, fire, etc. The multi-peril crop insurance (MPCI) is a standard product that is often subsidized by governments to make insurance protection affordable to local farmers and ensure that an economy has a sufficient amount of local crop production or financial compensation is available in case of poor harvests.
Among the various perils of the MPCI cover, temperature and precipitation play a key role in the productivity of the agriculture sector. The analysis of the specific impact of these variables on the crop production is elaborate as it varies by crop type (such as corn, soybean, wheat, barley) and planting phase (seeding, growing, harvesting). Frost and drought are devastating during the seeding phase, excess heat is bad during the growing phase and too much rain can prevent harvesting because fields become inaccessible.
Allianz offers traditional crop insurance products and also complements its product range to the agriculture sector in the form of specific and tailored weather products. A key advantage of these weather covers using a specific weather variable is the fast and objectively measured claims process. In various places around the globe, Allianz has helped farmers protect their crops against adverse weather.
In addition to providing insurance solutions directly to farmers, ART has also been active in the corporate agriculture sector identifying key weather risks of seed and fertilizer companies and companies in the food industry. Whether underlying food product involves blueberries in Poland, hazelnuts in Turke, grapes in South Africa, or sugar canes in Brazil, in each case, ART’s team of experts analyses the business, often in cooperation with an insurance broker, and devises a suitable and tailored protection plan.
ART’s Climate Solutions team is active on all six continents and offers solutions to companies in various sectors against almost any weather scenario. We collaborate with other Allianz experts and the local Allianz Group insurance comany or network partner to develop proactive solutions in a fast and ever changing world to address the critical topic of climate change.
Karsten Berlage is Managing Director at Allianz Risk Transfer (ART), Inc.. He heads up the Climate Solutions group which deals with weather and agriculture business. Karsten grew up in Hamburg and is currently based in New York. Prior to joining Allianz in 2008, he was an investment banker at UBS.