Travel; an emerging area for risk transfer?

by Artemis on July 4, 2008

Travel is an industry which is naturally exposed to weather and climate risks. Beach resorts want good weather and low rainfall to encourage customers to visit, ski operators want sufficient amounts of snowfall to ensure a good season and tour operators want quiet hurricane seasons to keep interest in core destinations such as Florida and the Caribbean at a high. Surprisingly though they aren’t very well prepared for events such as these.

I see the travel industry as a major opportunity for risk transfer and weather trading right now. Traditional weather insurance is either expensive or not flexible enough to cater to the needs of the industry, tour operator bonding does not provide the same levels of protection as a diversified risk management program. Now is the time to develop new products to cater to this market as weather and climate is very much a topic of interest right now.

Tour operators for instance can acquire a bond to give them a level of protection from events abroad (such as weather or political incidents) but these are generally only good for repatriation and refunds for travellers. None of the cover tour operators generally take out protects them from the knock-on effects of an active hurricane season such as reduced interest from customers for that destination the following year or loss of business from damages incurred by contracted hotels. With so many of these operators sending people to high-risk hurricane areas it would make sense for them to access the capital markets for further balance sheet protection. Catastrophe bonds seem expensive to these operators but most are uneducated to the alternatives such as derivatives or futures, perhaps now is the time to educate them?

Many approaches have been tried by the travel industry and certain sectors are becoming end-users of products like weather derivatives for temperature, rain and snow but there is much more opportunity available to this industry to expand to more exotic alternatives.

Travel Weekly has a good article on the impacts of extreme weather to the UK travel industry.

Also, read our coverage of Weatherbill who have targeted the travel industry effectively.

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