Arises out of the normal use of property and is excluded from property insurances although would not, in any event, be embraced by terms such as ‘accidental damage. However, ‘new for old’ policies disregard wear and tear in claims settlements. See REINSTATEMENT POLICIES.
***
The amount deducted from a claims payment in recognition of the depreciation of the property insured through usage of it over time. Where cover is provided on a ‘new for old basis’ ie where the insurer agrees to replace an old item with a similar new one, no such deduction is made.

A security, swap or option whose value is directly related to weather events over a specified time in a specified location. Weather derivatives pay cash flows depending on occurrences such as deviations from average temperature, precipitation levels, etc. Companies use weather derivatives as a hedge against weather conditions damaging to their trade, e.g. pavement café suffers during a cool summer and may acquire heating degree days. See COOLING DEGREE DAYS; WEATHER SWAPS; WEATHER INDICES; ENERGY DEGREE DAYS; GROWING DEGREES; PRECIPITATION.

The underlying index upon which weather derivatives are based. The two main temperature indices are heating degree days and cooling degree days. Other weather variables: maximum or minimum temperature; critical temperature events (temperature passing a defined value); rain and snowfall; windspeed.

Insurance for the promoter of an outside event, e.g. outdoor play, that depends on specific weather conditions. The policy pays if, for example, a preset rainfall level is exceeded leading to cancellation or reduced attendance. See ABANDONMENT OF EVENT; WEATHER RISK; PLUVIUS POLICY.
***
The basic purpose of “weather insurance” is to give payouts by estimating the percentage deviation in output due to adverse deviations iin weather conditions. In weather insurance the contingent claims are determined by an objective weather parameter (such as rainfall, temperature, humidity) that is highly correlated with the type and class of production unit. Particularly, related to crop production.

1. Adverse effect on corporate costs or revenue of the non-catastrophic effect of weather that deviates from normal conditions; e.g. poor heating energy sales due to mild winter. Weather-sensitive businesses use weather derivatives. 2. Risk of injury/damage by high severity/low probability events such as severe windstorm. Insurance is the usual response. 3. Adverse effect on insurers’ underwriting results following widespread losses through hurricane, tornado, flood, etc. Reinsurance is the traditional response, but catastrophe bonds or swaps, and other alternative risk transfer products, are also used. See also WEATHER INSURANCE; PLUVIUS INSURANCE.

The weather risk is managed by hedging against poor sales volume and/or increased costs caused by unwelcome weather conditions. Weather derivatives supplement existing risk management tools. The main weather risk management products are structured as caps (see CALL OPTIONS), floors (see PUT OPTIONS), swaps and collars.

Trade association for companies and organisations wishing to the risks associated with unwelmanage come weather. WRMA promotes the industry, provides forums, including an annual conference, for discussion and interaction with others associated with financial weather products.

Like a catastrophe bond it transfers the insurance risk to the capital market. Bond investors sacrifice their interest and/or capital if weather conditions deviate from a reference point. The insurer may, for example, hedge against a prolonged spell of extreme cold capable of triggering an excessive number of weather-related claims.