From the Brock News
TUESDAY, JANUARY 30, 2018 | by Dan Dakin
When it comes to predicting long-term weather, humans hold little advantage over Wiarton Willie or Punxsutawney Phil.
That’s not good news for businesses who need consistent forecasts to succeed, but are increasingly faced with volatile weather patterns.
“Even though short-term weather forecast models have gotten very good, long-term forecasts are not very accurate, so there’s a lot of uncertainty in terms of what’s going to happen,” says Brock Geography and Tourism Studies Professor Tony Shaw. “Industries that rely on the weather have to take necessary precautions. Those uncertainties mean the risks are quite high.”
Shaw says that while January thaws like what we experienced late last week and over the weekend are not unusual, the dramatic swings in temperature are.
“What we’re seeing is changes on a daily basis tend to be on a bit of the extreme,” he says. “With climate change we can expect to see more volatility and variability in the weather.
“On the optimistic side, despite the occasional extreme cold temperatures, winters in Niagara are getting warmer and spring is arriving earlier based on long-term temperature trends.”
Goodman School of Business Professor of Finance Don Cyr says the weather volatility means businesses across many sectors are having to turn to measures such as weather derivatives — financial contracts that protect them by allowing them to hedge weather conditions.
“There is a growing interest in this quasi-insurance market as the weather becomes more volatile,” says Cyr. “Weather-related risk can affect about 25 per cent of the gross domestic product for Canada. In some countries, it’s as high as 40 per cent. It’s pretty significant.”
He says insurance companies and other financial intermediaries have long offered financial protection to industries such as agriculture, tourism and outdoor sport resorts such as golf courses and ski hills.
“These weather contracts allow firms to hedge against systemic weather risks — volatilities that wouldn’t typically be covered through insurance,” says Cyr, adding that these contracts have been famously used by a salon in a mall that noticed a drop in business on sunny weekends and a restaurant chain specializing in outdoor dining to cover their losses due to cool, rainy summers.
Municipalities have also used the contracts to hedge against the unexpected costs of snow removal when winters are worse than expected.
Article reposted from the Brock News
