At this time of year retailers all over the world are hoping it doesn’t snow. If you’re a UK retailer you may be a little disappointed and be glancing up at the sky nervously. Why? Well there’s a chance you’re running a weather refund promotion which means you could be literally giving your products away if it snows.
Of course, you’ve got a weather risk contract to protect your bottom line should this happen haven’t you? So you won’t be out of pocket at all and it just serves as a great extra temptation to bring consumers to your store and to get them to buy your product.
Weather refund promotions and weather guarantees are growing in popularity around the world (recent coverage in the Philadelphia Inquirer). They’ve been increasing in popularity over the last couple of years as more brokers and underwriters have emerged to take advantage of this marketplace. In reality they are used more as a marketing tool than a weather risk tool. The main reason for using one is to attract extra custom by offering an amazing money-back deal (and one that won’t leave you out of pocket). As the market matures we see these deals moving to new sectors and being taken to new extremes (see our previous coverage of weather refund promotions).
This is fast becoming one of the most active areas of weather risk management. Paying out based on actual experienced weather conditions (eg. snowfall on a certain date), they are generally underwritten by weather derivative contracts further up the chain of risk.
They serve as a good reminder that due to the measurable and predictable nature of claims on weather risk contracts it is easy to package easily repeatable deals into a product which can be sold direct to the end-user. It’s very similar to the weather-index insurance market in the developing world, where they’ve taken the principals of weather risk management and created a niche product that can be sold direct to consumers. As the market matures we expect to see more innovations in this area.