Weather insurance provides some shelter from the storms

When the rain rain rain comes down down down, the outdoor segment of the out-of-home entertainment industry often sees profits washed down the drain gutter. The soaking taken by amusement parks, fairs and festivals in the Midwest and on the East Coast last summer is a painful reminder of the economic havoc Mother Nature can wreak on these and other operations.

In the past five years, however, as weather data reporting has become more reliable through a network of national weather stations, insurance against bad weather has been gaining acceptance.

About a half-dozen companies — AIG, Travelers Property Casualty Corp. and Lloyd's of London are among the bigger ones — provide such coverage as part of a growing phenomenon. Below that level are some specialty market insurance providers and a handful of reinsurers.

"It's been around a long time and never gained too much traction until about five years ago when the insurance companies (started getting) more information from weather stations and were able to rate risk better," says Raymond Liberatore, vp marketing at Boston-based All Weather Insurance. "The past five years have been incredible in terms of the growth in the number of users of the product."

The most common product is rain insurance, which allows the insured the ability to hedge against unrecoverable expenses such as ticket and concession sales losses. The policies are structured so that operators are reimbursed a predetermined value if a certain threshold of rainfall is met during the insured hours.

The cost is between 2% and 10% of the insured amount, so a $1 million policy would run an operator anywhere from $20,000-$100,000.

What kind of events can be covered?

"Any event or business that is impacted negatively or financially by adverse weather — any outdoor fair or festival, amusement park, any concert that's going on outdoors (can be insured against weather-related losses)," Liberatore says. He notes that even indoor events that are negatively impacted — if snowfall keeps people off the road and out of an arena for a show, for instance — can be insured.

"The bulk of the business is derived within the rain coverage spectrum: fairs and festivals, outdoor amusement parks, concert promoters, sporting events, rodeos, any event or business whose revenues are adversely impacted by weather, be it the Arizona State Fair, a rodeo in the Midwest or a Britney Spears concert in New York state," Liberatore says.

Derivative products that insure against losses from high or low temperatures, high winds — just about any measurable peril — are also available.

Liberatore won't discuss policies written for specific clients, but he notes that amusement parks can and sometimes do insure entire seasons.

"We have a couple of clients that buy seasonal coverage, and they get a considerable discount," he says. "Say a park has 15 summer concerts throughout the season and doesn't want to take a series of hits. They have to pay the performers even if they don't play (or if weather keeps expected crowds from coming to the park on the day of a show). A lot of parks have hedged against that risk by taking out insurance."

Dates and locations are the most important factors in determining rates, Liberatore says. The client determines how much they want to be insured for and the underwriters rate the risk and set a rate. Anything over 10% is difficult if not impossible to sell, he says.

One might expect that more rain-prone areas would see higher rates, but that isn't necessarily so. The tolerance for rain is different in various parts of the country; a drizzle might turn a Southern California event into a bust while the same amount of rainfall in the Northwest would have little effect on event attendance.

Every detail of the coverage — including the threshold at which the coverage kicks in and where the rainfall is measured, for instance — is agreed upon in advance, and so disputes are not common, Liberatore says.

"When we quote out, they say, 'We want insurance coverage for this day, at this location, for this amount,'" he said. "We go back and say the nearest national weather station is this and if it is more than 10 miles away we advise they seek an independent weather observer that's prequalified by the insurer. But the national weather stations are the primary source of claims."

Liberatore said there are some Major League Baseball teams that have utilized weather insurance for games they were unable to reschedule, like interleague games.

Given the inexact nature of predicting weather, potential clients are advised to build the cost of weather insurance into their budgets, making it a regular cost of doing business instead of trying to protect against losses on a one-off or piecemeal basis.

Unfortunately, there is no hedge against boneheaded weathermen.

"Even if a meteorologist forecasts rain and it doesn't rain, it does have an impact," Liberatore says. "But there is no insurance for that."