weather stations.

B ERMUDA-based insurance companies are marketing a new type of weather insurance, Weather Index Insurance, to local governments and large corporations which have substantial sensitivity to weather fluctuation.

Insuring against loss or damage caused by weather is not new business, but has generally been on an indemnity basis, that is compensation for actual loss experienced.

The new products being marketed by Commercial Risk and Ace Tempest Reinsurance are index linked, the index used being statistics provided by registered weather stations. Cover is guaranteed to cut in at a level predetermined in the insurance contract and reported by the weather station, regardless of the degree of loss.

Christopher Phelan, managing director of Commercial Risk, explained: "In an extreme winter local government bodies may have to spend more money to heat their buildings or remove snow from the roads, etc. If we can wrap all these eventualities into one insurance product then they can guarantee their budgets instead of having to raise money to pay for them retrospectively.'' As a result of deregulation in the US, utility and energy companies have been able to make use of these index-linked products and Commercial Risk expects this pattern to be followed in the UK and EU as deregulation is applied there.

"Utilities were the quickest to embrace this product as it is easier for them to understand their risks. They know exactly what a degree change in temperature will cost them,'' said Mr. Phelan.

As a risk management product the insurance companies believe it will be very valuable to a variety of local government bodies and businesses. Brock Webel, manager of the weather desk at Ace Tempest Reinsurance, said: "The focus has been with utilities so far. But we are getting inquiries from government bodies outside the US.

"For instance there is beginning to be a heightened profile for these products in the UK where events such as the large amounts of rainfall and flooding this winter may spur them on. Another area of interest is sports related businesses such as operators of ski resorts who rely on levels of snowfall.'' Mr. Phelan explained that weather index insurance was sold as a finite contract, there is no open ended liability. The insurance companies have in house weather experts and product design and calculation of premium is tailored to suit each individual need and circumstance.

"Most weather business has been centred on normal weather fluctuations. But the weather is a very volatile phenomenon, every year we have weather we have never seen before,'' he said.

Grape growing is a business that can benefit from these products as weather is the single most important factor affecting crop production. In 1997 Italy, France and Spain all suffered significantly reduced table grape production due to frosts and heavy rain.

The following year California's wine grape production was reduced by 25 to 30 percent due to unusually cool and rainy spring and early summer weather followed by very hot weather in July and August.

Weather index insurance can be used to eliminate financial weather-related exposure and therefore stabilise profit levels which creates an advantage over competitors in revenue forecasting.

Weather insurance hit by winds of change This in turn reduces foreign exchange risk management requirements and will improve standing in the financial world, which can reduce the cost of debt.

Another climate affected industry that can benefit from this insurance product is the construction industry.

In excess heat tar melts, concrete sets too fast and materials expand, while in freezing temperatures it is too hard to dig, concrete sets too slowly and materials shrink.

Labourers cannot work and crane use is suspended in high winds and excess rain makes the ground too wet to dig and the quality of concrete and masonry is impaired.

Adverse weather can delay production, necessitate costly changes and result in financial penalties.

An insurance product can be designed to ensure pay out if rainfall reaches above a certain level or temperature fluctuations are excessive. This will suppress profit fluctuations by guaranteeing a minimum level of income.

Other examples include leisure resorts that can be insured against low income from adverse weather conditions, energy utilities, retail businesses and many types of agriculture.

Mr. Phelan said they have been talking with citrus growers, who lose part of their crop in freezing conditions, and insurance companies are having to design products for them involving other issues.

"There are around 200 fully automated national weather stations in the US which we use as there is no chance of human error.

"However citrus groves are usually fairly far from a weather station and their differing weather is an issue we are examining.'' Under water: Large amounts of flooding recently, in Bermuda and overseas, typify the volatility of the weather. Now insurance companies are marketing the Weather Index Insurance. Pictured above is a scene in the aftermath of Hurricane Gert, which slammed Bermuda.