(February, 2011)

In general, weather insurance protects the insured sponsor of an outside event or a manufacturer of a product that is dependent on or subject to weather activity. It covers most financial loss such as reduced revenue, increased expenses or inventory loss, as well increased product promotion expense. It responds to the need for financial protection of legitimate activities that are planned in advance, but are vulnerable to failure due to weather events that are beyond the insured's control. The goal of weather coverage is to provide adequate, customized, protection for a reasonable premium.

Weather insurance has evolved from its beginning as a Lloyd's of London form, known as "Pluvious (characterized by heavy rainfall) insurance." The name was later changed to Rain insurance. At one time it was a special coverage form adopted by the Rain-Hail Insurance Association, which filed rates and forms on behalf of its member companies.

Two recent technologies have facilitated the development of current weather insurance. First, the collection of worldwide weather data and climatic information of all types has made more accurate statistical determinations of weather risk possible. Second, the arrival of personal computer database technology has made retrieving local and/or global data fast, practical and inexpensive.

Despite these advances, Weather insurance remains an underutilized coverage because many insurance professionals and their clients are unaware of the many uses of this product.

A frequent misconception is that Weather insurance applies only to outdoor events. Weather is an outdoor phenomenon but its consequences are often felt indoors. Gate revenues for all types of public events can be hurt by severe weather. Event promoters and convention organizers have insured against the possibility that tickets may have to be refunded in the event of a severe hurricane, ice storm, blizzard, or flooding.

Example: After investing more than $50,000 for their daughter's outside wedding, the Johnsons are relieved when their agent phones to tell them that their event insurance application was accepted. The agent assures them that the policy has been arranged to protect their deposits for the hall, food or music in the event a wedding has to be cancelled because of a serious wind or rain activity.

RESOURCES

In the U.S. Market, the National Weather Service (NWS) remains the primary source of meteorological data and forecasts. However, there are demands for information that is not available from the NWS, such as long-term forecasts or forecasts tailored to the needs of individuals and businesses. Today, private forecasters often have more advanced techniques and technology than the NWS (due to private funding and fees). They use the information available from the NWS along with their own data and are willing to make riskier and longer-term forecasts. Their weather predictions are also offered on either a general or an individualized basis. Therefore, in search of profitable markets, private forecasters have arisen to supplement and refine the weather information provided by the NWS.

TARGET CUSTOMERS

The potential applications and range of customers for weather insurance are quite broad. The policy is most useful in the following, general areas:

1. It can be used to protect against the cancellation of, or diminished revenue from, events such as outdoor concerts, civic, governmental or fraternal outdoor activities, fairs and carnivals, weddings, receptions and sporting events.

2. It can act as a marketing device. Consider a manufacturer of snow blowers offering refunds if snow accumulation is substantially less than average in order to increase sales or an air conditioner manufacturer with a similar incentive who faces a cool summer. In such cases, the insurer would need an application that:

·         provides the name of the insured,

·         the insured location,

·         the nature of the promotional campaign (too much or too little snow or temperatures too high or low),

·         start and end dates of the campaign and

·         the total dollar value of sales.

Other information needed might include anticipated sales per region, a description of the product(s), their prices and/or service provided and historical sales data.

3. It can assist with cash flow stabilization, in such cases as low snowfall hurting ski equipment company's sales or an extreme amount of snowfall substantially increasing a small town's snow removal expenses. Actually, within this domain, utilities and energy companies have displayed the greatest interest. In those realms, small changes in weather patterns can result in multi-million dollar gains or losses.

Prospective weather insurance customers include:

municipalities	airports	airlines	Farmers
condo and other property assocs.	churches	owners of multiple properties	banks with a network of branches
inside/outside sporting events	commodity brokers	seasonal businesses	carnivals, exhibitions, fairs and excursions.
golf courses	utilities	concert venues	stadium owners
resorts	campgrounds	special event promoters	schools

 

The possibilities appear only to be limited by imagination. Any event that might be adversely affected by weather is a prospect for this coverage.

INSURANCE MARKETS

Coverage is usually available to agents through Managing General Agents (MGAs), wholesalers or brokers that have access to Lloyd's organizations or specialty markets that offer weather insurance. Since each coverage situation is unique, "manuscript" policies, incorporating some common terms and conditions, are common.

THE APPLICATION

The typical weather insurance application contains details on both the producing agency and the MGA, including questions concerning licensing, use of admitted or non-admitted markets, existing Errors & Omissions coverage and related issues. The name and address of the applicant must be disclosed along with a detailed description of the event and its exact location. The event date and hours must be listed and the time period for which coverage is needed specified. The weather organization being used for recording weather information must be specified and the weather recording location or station must also be described. The weather causes of loss/peril(s) must be specified. These include such measures as rainfall accumulation, rain-free hours, wind, temperature, sky cover (cloudiness), percentage of sunshine, generally severe weather not otherwise classified or other measures specifically indicated.

The measures for each selected item (fractions of inches of rain, wind speed, temperature, and percentage of cloudiness or sunshine) must be stated. The limit of insurance must be stated and the source of the income or revenue (ticket sales, admissions or other charges) disclosed. Recovery of the limit is generally based on the numerical measure of the selected peril(s) being exceeded or in some cases not met. Information such as gross income or expense and profit of similar events held in the past might be requested. The source of revenue (admissions, ticket sales or other types of charges) should be disclosed. The insurable interest of the insured in the event needs to be known and any information on a "rain date" in the event of a postponement is needed. Finally, if there is any other insurance applying to the event, that information must also be disclosed.

COVERAGE

The sole purpose of weather insurance is to cover loss of income during or before a scheduled event when weather conditions reduce anticipated crowds, diminish receipts or forces a cancellation. The insured is indemnified for loss up to the amount stipulated in the policy. The loss has to be caused by extreme climatic conditions (specified in the policy) that occur during stipulated hours on a date or dates scheduled on the policy.

The coverage clauses and a schedule of insurance section attached to the policy provide the details of the insured event, period of time insured, amount of insurance provided, and amount of rainfall, other perils covered by the policy and the rate and premium.

Causes of loss or perils covered under the policy are usually expressed as precipitation-free hours, lack or excess of rainfall or snowfall, wind speed, high or low temperatures, sky cover or sunshine or some other peril. Measurements are by official weather stations that report weather-related elements on an hourly basis. With the data that is available from the designated weather station, the insurer in a matter of hours can verify measurements.

Rain Coverage

There are four basic types of coverages against excessive rainfall for any covered special event:

Cumulative Rainfall - A specific amount of rainfall that is not to accumulate within the specified time period of coverage for the insured event.

Example: The insuring company provides that, between the hours of 7:00 p.m. and 2:00 a.m. on August 15 and 16, 20XX, no more than 1/10 inch of rainfall will accumulate at the National Weather Service station based at the Indianapolis International Airport.

 

Naturally, if the accumulated rainfall exceeds the stated amount, the policy's coverage is triggered.

Consecutive Dry Hours - A specific amount of rainfall that is not to occur each hour for a portion or all hours of the event is insured. The rainfall amount is generally smaller than the cumulative rainfall coverage (1/100 or 2/100 inch of rain). It is further stipulated that dry hours will be consecutive or adjacent to each other.

Non-Consecutive Dry Hours - A specific amount of rainfall that is not to occur each hour for a portion or all of the hours of the event is insured. The insured dry hours may occur at any time within the covered event time period.

Extended Period - This term is used when the coverage period is for more than one day. Extended period coverages are a combination of the first three coverages explained above.

Snow Insurance

Provides coverage against loss due to snow-related activity including:

1. Loss of revenue due to lost attendance, reduced ticket sales or liability for event expenses due to event cancellation that is caused by a specified accumulation of snow during a specified time period.

Example: A town arranges coverage for its annual Winter fest. It buys coverage to protect against the probability that no more than six inches of new snow will fall between the hours of 8:00 p.m. and 5:00 a.m. at the nearby airport on January 17 and 18, 20XX.

 

2. Loss of revenue due to unanticipated, extreme level of snow that affects an event, promotion, seasonal operation or that creates an increase in snow removal expense.

3. Loss of revenue due to lost attendance, reduced ticket sales or liability for event expenses due to event cancellation that is caused by a LACK of occurrence or accumulation of snow during a specified time period.

 

Example: GambleClime Ski Resort has learned its lesson. The resort's owner decides to buy a snow policy after experiencing wildly fluctuating snowfall the last five years. This year, if a lack of snow affects his revenues, his policy will help minimize losses. He arranged for enough coverage to handle staff expense, mortgage payment on the resort and other, related expenses.

 

Note: Coverage may also be arranged on a per accumulation or per storm event; whatever approach can best accommodate a given exposure.

Wind Coverage

In some cases, it provides coverage against higher or lower wind velocities compared to the average velocity over a three-hour period. In others, it provides coverage against the fastest mile per hour wind speed. Such speed is defined as the highest recorded wind speed at which a mile of wind passes a given National Weather Bureau station-measuring device.

Temperature Coverage

Provides insurance against maximum, minimum or average temperatures during specific hours, days or weeks.

Example: A charity has its largest fundraiser the same day each winter; a polar bear dive and swim. The event loses tens of thousands of dollars when, on the day of the event, the temperature is above 40 degrees. Fortunately the charity purchased temperature coverage.

Sky cover/sunshine

Provides coverage if designated percentages of cloudiness or sunshine during specific times on a specific day or dates are not met.

Severe weather causing cancellation

Provides coverage if some other described weather condition occurs with specific time, date and unit of measure parameters indicated.

Remember that these causes of loss can also be combined for a given event.

Example: A committee for an annual summer jazz festival buys a weather policy that protects their event against a specific amount of rain and a designated number of consecutive dry hours coupled with extreme wind gusts.

EXCLUSIONS

The policy does not cover loss caused by, resulting from, contributing to, or made worse by:

·         Any perils other than the insured peril described in the insuring agreement.

·         Any fraudulent or dishonest acts committed by an employee, officer, director, partner, and trustee or authorized representative of the insured.

Example: An insurer receives a claim from a theater festival which reports it had to cancel its event due to an unforeseen period of very high temperatures and humidity. The insurer finds out that the promoter never filed an event license nor did they rent facilities or sell tickets for the event.

·         Any changes in normal weather patterns caused by or resulting from, contributed to, or made worse by nuclear causes of loss/perils.

·         Any losses involving bodily injury liability, property damage liability, or damage to property.

·         Loss of profits.

The policy only covers loss of income or revenue from the specific event. It is intended to restore the insured to the condition he would have been in had no loss covered by the Weather insurance policy occurred. Loss of business income coverage forms is available for covering loss of earnings.

Related Article: Time Element Coverage Forms Overview.

Other exclusions may be added to reflect concerns relating to a specific event. The exclusions listed above are not usually deleted or subject to negotiation.

SPECIAL CONDITIONS

Rate quotations may usually be obtained from the insurer so that the applicant/insured knows the amount of premium to be sent in with the application.

There is no coverage without a completed application and the accompanying premium payment. Normally, the broker or insurer must receive both the application and the full premium at least seven days before the scheduled event. This rule avoids requests for coverage at a time when weather conditions already threaten an event.

When the application and premium are received and the policy is issued, there is no return premium. The policy is not cancelable unless the event is called off for reasons completely beyond the control of the insured.

Example: A week before the event, a county sheriff cancels an outdoor concert because of safety concerns related to crowd control.

 

In the event that the precipitation or other measurement as stipulated is not available by either a private weather observer or the National Weather Service station for any reason, an hourly precipitation or other measurement recording from the Federal Aviation Administration station nearest the location of the event can usually be substituted.

CUSTOMIZED PROGRAMS

Writing Weather insurance can range from simple to very creative programs which can assist in other ways to manage exposures, such as income stabilization or as a hedge against losses due to weather-related promotions.

Related Court Case: Business Income Loss To Car Dealership Resulting From Snowstorm Not Eligible For Coverage.

It may be applied to many different situations because of the coverage's flexibility.

Examples: Cozy General Utility Corporation just purchased a huge weather insurance policy. Its Risk Manager wanted to avoid a major loss of income when, two years earlier, their service area experience an unusually warm winter, reducing company sales by nearly 20%. • Outdoor swimming pools, camping equipment or outdoor furniture manufacturers may insure their cash flow against being seriously impaired by unseasonably cold weather • Service companies can protect their cash flow from impairment inclement weather that restricts their normal number of annual service calls. • Yacht Race Promoters can insure their events against the consequences of too much or too little wind and other adverse weather. • A major, upscale clothing chain routinely uses weather insurance contracts to hedge against its major investment in fur coats and jackets. • An association of almond growers purchases Weather insurance to protect their crop yields from extreme temperatures and precipitation levels during the crucial pollination period. Bees can only pollinate fruit crops efficiently if there are enough days with moderate temperatures and minimal rainfall at specific times during the pollination period. • Weather insurance has been used by municipal water authorities and hydroelectric plants to provide protection of revenue in case minimum reservoir levels aren't maintained throughout a dry seasonal period.

 

A variation of Weather insurance may be used to cover a portion of a vacation season for seasonal businesses as resort hotels and motels or outdoor recreational businesses such as rental centers for water sports and marinas against excessive rainy or cold weather. The same concept may be used as an incentive for individual vacationers to insure a portion of their vacation costs if more than normal precipitation occurs during their vacation.

Underwriting and Rating

With weather insurance, the difference between underwriting and rating can be rendered moot. An insurance request, ultimately, has less to do with the entity requesting coverage. Typically the parties prior loss history may be non-existent (a one-off event) or irrelevant.

Example: the board that runs an annual, day-long outdoor fair and concert is seeking coverage through its insurance agent. The agent asks a weather carrier if the rate will be much higher since last year's event was interrupted by an unexpected thunderstorm. The agent is told, no as the rate is still based on decades of weather information for that date and location, not on a recent loss.

 

Rating is based on the location, date, time, and type of weather and limit of insurance needed. Specifically, rating involves access to the detailed database that incorporates many years of data accumulated by the hour at weather stations around the world.

Such databases assist specialty insurers to actually calculate a probability of a given meteorological event occurring. This probability is the basis for the rate. Certain mitigating circumstances may increase or decrease the base rate, such as geography, topography, recent phenomena or trends such as global warming.