Weather Derivatives to Supplement Insurance Policies

Whether you are purchasing homeowner's insurance, auto insurance or travel insurance, it is important to understand the dynamics of your policy and compare that to the premium you are paying. In many cases, standard policy language, as approved by your particular state's insurance department, is provided. In cases where your property, or travels, do not meet standard or traditional guidelines, there may be a necessity to seek out non-traditional insurance protection.

In recent years, there has been a growing focus towards the purchase of supplemental insurance coverages, especially that involving weather related events. Known within the insurance industry as weather derivatives, many personal lines of insurance protection and business insurance coverages now offer optional supplemental coverages against adverse weather events.

To underwrite a policy that involves a weather derivative can be quite challenging. Understanding this, if you are in the process of shopping and buying insurance, it is important to understand how your potential insurance carrier has assessed your risk and, ultimately, determined what premium should be attached to that risk. Often, using historical weather patterns and compared against the time-value of money in an actuarial process, your insurance company can propose a premium that is attached to specific policy limit for a weather related event.

Weather derivatives come in a variety of protections. Some offer protection for catastrophic events only while others offer a more broad scope of protection, including non-catastrophic events. While you may think you need coverage for an event that involves flooding, fire, tornado or hurricane, the fact is, many of the weather derivative policies also offer coverage for wind, excess humidity, excessive rainfall and even excessive snowfall. For business protection coverage, these types of broad insurance protections are important to managing the loss of revenue and profits to the business.