I recently had the opportunity to speak with David Westin from Bloomberg Radio’s Balance of Power. We talked about climate resilience, heatwaves, and parametric insurance. Here’s a brief summary of our conversation along with some clips from the on-air interview.
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What is Climate Risk?
Bloomberg: [If] you live anywhere in the lower 48 of the United States, or for that matter, anywhere in much of Europe, you know it’s been hot, even hot for July, and at least here in the Northeast of the United States. [We’re] supposed to peak sometime around Sunday, and it may be a hundred degrees in New York City.
To give us a sense of what this means, not just for all of our discomfort in our pets, but also for our businesses, we turn to Stephen Bennett, the Chief Climate Officer of the Demex Group and Chairman of the Committee on Financial Weather and Climate Risk Management for the American Meteorological Society.
Mr. Bennett, [give] us a sense of how you manage climate risk in this kind of environment.
Stephen Bennett: David, it’s all about weather extremes. And right now, heat is the primary weather extreme that we’re dealing with across a lot of the US, and as you mentioned, across a lot of Europe as well.
We are helping the business community understand the things that they can do to weather the heat, and the actions that they can take to either reduce costs or try to grow revenue for businesses that are affected by the weather.
What is The Demex Group?
Bloomberg: Give us a sense of the ways that businesses typically are affected by the weather. And by the way, before you do that, explain your company once again.
Stephen Bennett: At the Demex Group, we have a technology platform and we work with insurance companies and with businesses to basically provide financial resilience following extreme weather events.
Our technology is enabling new types of insurance that protect businesses during a heat wave or an extreme cold event where the temperature will drive either increased costs in a business or a decrease in revenue. Our company helps businesses recover financially through reimbursements from insurance companies.
How does Climate Risk Insurance work?
Bloomberg: Stephen, is that akin to what I think of as business interruption insurance?
Stephen Bennett: David, that’s exactly right. It’s very similar to business interruption insurance. In fact, this type of coverage, we expect will become standard in business interruption insurance as we go forward in time.
What businesses have climate risk?
Bloomberg: You just mentioned restaurants, for example. I’m not sure I would’ve thought of that right away. What are the categories of businesses that are particularly subject to these sorts of risks?
Stephen Bennett: It’s far and wide, from large businesses to small ones.
First, consider it from a cost perspective. During a heat wave, you’re trying to keep your space cool so that your employees and customers are comfortable. Electricity costs are the issue because you are running your air conditioning more.
Repeated heat waves over the course of several different years can affect a business as big as a large real estate investor or a REIT because the electricity costs will be higher than projected, and the profitability of that investment may be lower than expected.
On the revenue side, there are a lot of businesses that are affected as well. A lot of the national beverage companies, the big beer companies, and soft drink companies know that during extreme heat, you sell a lot of beverages. So they will actually prepare for these events by prepositioning stock and having more beer or water on the shelf when they know it’s going to get hot. [They’re] actually positively impacted by making more revenue during a heat event.
On the flip side of that, you may have a store or restaurant without air conditioning. You rely on people to come to your location to generate revenue. People aren’t going to come into a space that doesn’t have air conditioning during a heat wave.
What is the position of climate risk insurance in the insurance space?
Bloomberg: How old is this business?
[How] long has this been a major source of business and how fast is it growing?
Stephen Bennett: It’s grown very quickly, especially over the last five years. The community is recognizing that the character and nature of extreme weather events are changing, so we can’t just rely on what we’ve experienced in our lifetimes to plan our business. As the financial community has come to recognize that weather patterns are changing, they’re beginning to create these financial products to help.
The concept of financial resilience came about in the nineties with Enron and the others. But it’s just been within the last five years that the concept of climate impact and climate resilience has been a driver.
