Thursday, August 7, 2008

Protecting against weather risk

Wired: …As businesses contemplate losing massive amounts of money from events like droughts and hurricanes, WeatherBill hopes to carve out a market in the growing field of weather-related risk-management products, offering what are essentially weather futures contracts to companies with an internet-era twist. The contracts pay off automatically without any kind of claims process based on objective weather measurements like the inches of rain a given area receives.

The company is the brainchild of David Friedberg, who had previously been the business product manager for Google's AdWords and a founding member of the company's corporate-development group, where he led the search giant's acquisitions of companies like Picasa, Urchin Software, and dMarc. Friedberg left Google to launch WeatherBill in 2006.

The potential market for weather coverage is huge, since as much as 70 percent of American businesses are impacted by weather in some way. While the risks for companies like agricultural firms are obvious, businesses from movie theaters—which see ticket sales slump on sunny days—to transportation companies and clothing manufacturers are affected by the weather. It's estimated that $2 trillion to $3 trillion of the United States' nearly $14 trillion G.D.P. is weather-sensitive.

Businesses have long bought insurance against weather-related damages; more recently, they have been able to buy weather futures contracts on exchanges like the Chicago Mercantile Exchange, but the offerings are largely linked to temperature and are unwieldy and expensive for smaller companies.

WeatherBill takes a different approach, borrowing from AdWords' sophisticated, real-time auction engine for pricing keywords. Just as AdWords integrates the latest market changes on a continuous basis, the WeatherBill pricing engine correlates up-to-the-minute weather forecasts with trend data to assess a company's overall risk. Then it spits out a price based on all those factors, with all of this happening in a tenth of a second, and contracts can be purchased right up to the last minute since the latest weather information automatically gets incorporated into the pricing engine.

"For weather coverage to be useful, you have to customize it," Friedberg says. "It's not like car insurance—you're a male between 20 and 40 in San Francisco, here's your price for car insurance."…

A haunting stretch of road between Mögglingen und Lauterbach, by "Wildfeuer," Wikimedia Commons, under the terms of the GNU Free Documentation license, Version 1.2

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