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In past years, Pete Fisch used to cross his fingers, hoping it wouldn't rain during the annual golf tournament he manages in North Carolina. In 2005, it poured, costing the tournament tens of thousands of dollars in reduced ticket and concession sales. In 2006, the rain gods held off--and then last year, Fisch simply sat back and let come what may.
That's because a new online service called WeatherBill enabled him to purchase a contract that paid off in case of heavy rain--hedging away his exposure to the weather.
As it turned out, it did rain heavily last year. Fisch's tournament received a payout of close to $15,000 from WeatherBill. "We still took a loss of around $25,000 to $35,000, but it's better than the $50,000 we would have lost," Fisch says.
As businesses contemplate losing massive amounts of money from events like droughts and hurricanes, WeatherBill hopes to carve out a market in the growing field of weather-related risk-management products, offering what are essentially weather futures contracts to companies with an internet-era twist. The contracts pay off automatically without any kind of claims process based on objective weather measurements like the inches of rain a given area receives.
The company is the brainchild of David Friedberg, who had previously been the business product manager for Google's AdWords and a founding member of the company's corporate-development group, where he led the search giant's acquisitions of companies like Picasa, Urchin Software, and dMarc. Friedberg left Google to launch WeatherBill in 2006.
The potential market for weather coverage is huge, since as much as 70 percent of American businesses are impacted by weather in some way. While the risks for companies like agricultural firms are obvious, businesses from movie theaters--which see ticket sales slump on sunny days--to transportation companies and clothing manufacturers are affected by the weather. It's estimated that $2 trillion to $3 trillion of the United States' nearly $14 trillion G.D.P. is weather-sensitive.
Businesses have long bought insurance against weather-related damages; more recently, they have been able to buy weather futures contracts on exchanges like the Chicago Mercantile Exchange, but the offerings are largely linked to temperature and are unwieldy and expensive for smaller companies.
WeatherBill takes a different approach, borrowing from AdWords' sophisticated, real-time auction engine for pricing keywords. Just as AdWords integrates the latest market changes on a continuous basis, the WeatherBill pricing engine correlates up-to-the-minute weather forecasts with trend data to assess a company's overall risk. Then it spits out a price based on all those factors, with all of this happening in a tenth of a second, and contracts can be purchased right up to the last minute since the latest weather information automatically gets incorporated into the pricing engine.
"For weather coverage to be useful, you have to customize it," Friedberg says. "It's not like car insurance--you're a male between 20 and 40 in San Francisco, here's your price for car insurance."
The end result is that more types of weather contracts are available and more businesses can afford it. When Fisch's golf tournament bought its rain contract in 2007, the cost was just under $1,000, according to Fisch.
Like a typical insurance business model, WeatherBill's strategy is to sell against enough weather eventualities so that the events will essentially balance each other out. Insuring a soybean grower in Iowa against drought might be a money loser, for instance. But if the soybean grower is offset by the state's car washes, which do big business in dry weather, the risk is diversified. Not every customer has a precise counterpart, but a large mix of customers creates a diversified portfolio that, in turn, can bring down prices.
"Our business has all sides of risk--we've got customers wanting rain, drought, heat waves, frost, no frost. We even have people who want hurricanes," says Friedberg.
Since last year's launch, Friedberg says WeatherBill has signed policies with hundreds of customers, hedged hundreds of millions of dollars of risk, and brought in revenue "in the millions." A major deal was struck with Priceline recently, allowing the travel company to insure its users against rain on their vacations for no extra cost. (Priceline will refund the cost of a customer's trip if it rains heavily on more than half the days of their trip.) And the United States Tennis Association has announced it's buying a weather contract to hedge against weather-related losses at this year's U.S. Open, although it hasn't released details.
The Commodities Futures Trading Commission, which regulates weather derivatives, currently limits WeatherBill's customers to accredited investors with a minimum net worth of $1 million as a way of limiting the influence of speculators. But Friedberg hopes to persuade the C.F.T.C. to change that requirement soon and eventually offer policies directly to individuals wishing to protect weddings, travel plans, and other events. As with businesses, premiums would shrink as more customers are integrated into the algorithm and the risk is balanced out.
And Friedberg says that global warming and the volatile weather of the last few years set the right conditions for his business.
"Citrus farmers will call us and say, 'We had four frost events last year. It was nuts. My crop was diminished by 15 to 20 percent,'" Friedberg says. "A lot of ski resorts were shut for much of 2006 and 2007 in the Northeast because it was really warm. They called us the next year. Our customers are definitely aware of climate change and its impact."
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