Guarding against the extemes of weather

A summer during which Australia has experienced extreme weather conditions including tropical cyclones, record high temperatures, flooding and storms that led to the cancellation of many Australia Day celebration events, has again demonstrated how many events and businesses, especially those held outdoors, depend on favorable weather conditions.

The Australia Day storms in southern Queensland and northern NSW, highlighted the impact of extreme weather with events cancelled, schools closed and even some of the Gold Coast's theme parks having to suspend operations through what would have been expected to be a peak trading period. And these events followed a string of natural disasters in the popular tourist region in 2011, including heavy flooding.

With extreme volatility in weather patterns confounding peak trading seasons in summer, many providers of outdoor leisure events and services are consulting CelsiusPro, Australia's first-ever provider of weather certificates to industries vulnerable to adverse weather – with the outdoor attractions, entertainment and events sector one of the key areas of speciality for the Australian company.

CelsiusPro Chief Executive Jonathan Barratt explains "in recent years, weather certificates, also known as weather derivatives, have started receiving more attention. These highly effective hedging instruments have a wide range of use - from the World Bank hedging against drought in developing nations, to wind energy companies insuring against low wind speeds, and to theme parks hedging against rain.

"A number of event organisers have already discovered the advantages of weather certificates. While the certificates are available for various weather parameters - rain, cold, heat, sun hours, snow - most organisers purchase protection against rain.

"Weather certificates are a great tool to eliminate downside risk and earnings volatility caused by adverse weather conditions (and) they are easy to customise to fit needs and budget."

The procedure for obtaining a weather certificate is straightforward: the client selects a weather station close to the event location, picks the event dates, then defines a 'rain day' by deciding which amount of rain per day is critical (for example 5mm), and lastly determines the payout they would like to receive per rain day.

Barratt adds "the weather measurements are taken from official Bureau of Meterology weather stations, and if the defined parameters occur, the client will be paid out automatically.

"One of the main advantages over regular insurance (is that) there's no need to submit a claim or prove financial losses.

"While these products used to be fairly difficult to obtain and calculate, CelsiusPro offers an online pricing tool on our webpage.

"A short example: an event in Sydney would like to get cover over the Easter long weekend. Their exposure is $20,000 and while they have budgeted a day of rain, their balance sheet would not allow a total rainout over three days. With a threshold - indicating above what level of daily rainfall the payout kicks in - at 15mm, the premium amounts to $2,000 - guaranteeing the event a profit of $18,000, no matter how the weather turns out."

Barratt also quotes another example "the Street Parade in Zurich, one of the main techno-music events in Europe with close to a million people attending, got a lot of press last summer when the organisers disclosed they no longer wanted to gamble on the weather.

"In the two previous years, heavy rainfall had dampened many party-goers enthusiasm to consume food and drinks, if they showed up at all.

"The Parade's funds wouldn't (have been) able to afford another washout and the organisers opted for a weather certificate to secure revenue. Although on this occasion the weather turned out to be sunny, they don't regret purchasing a weather certificate, despite not receiving a payout. The profits easily covered the cost of the premium paid."

As well as the events industry, weather certificates are also gaining popularity with a range of attractions including theme parks, many of whom are using them to cover their entire summer season. Others focus on protecting certain events, weekends or vacations.

Barrett also believes that weather certificates have uses at other times of year, particularly during Australia's winter and spring season when weather can also be quite unstable.

Here he suggests that they help avoid a situation where "when it rains, people tend to stay at home or go to the movies instead."

Barratt concludes "yes, it is (still) impossible to control the weather, but it's good to know that the weather doesn't necessarily have to control one's financials!"

Visitors to the CelsiusPro website can register for a free account to price up their own weather hedge, test the strategy and or sign up for a live account to execute a specific strategy.

For more information call Stephan Sola at CelsiusPro on 02 9994 8009, E; stephan.sola@celsiuspro.com.au, www.celsiuspro.com.au 

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