Weather risk hedging seen boosting global economy

NEW YORK (Reuters) - Insuring against weather-related calamity in this era of global warming might seem the work of bean counters and actuaries.

But a study by WeatherBill, an Internet firm offering weather-related risk cover for individuals, as well as companies and governments, says the global economy could expand by up to $258 billion if such contracts were more widely purchased.

It calculated country rankings using three types of weighted data, including weather observations by country, national GDP by sector and weather elasticity, or sector-specific sensitivity to weather.

Among the 68 countries in the study, the U.S. economy ranks nearly last overall using those three measures, but was listed with the highest weather sensitivity in dollar terms.

"The United States' economy has a total weather sensitivity of roughly $2.5 trillion, 23 percent of the national economy," WeatherBill CEO and founder David Friedberg said. "In contrast, Bolivia has a total weather sensitivity of just over $2 billion. That's 31 percent of the Bolivian economy."

Customers large or small can create a contract and determine under what weather conditions they would like to be compensated. The contracts are purchased online to protect against weather events such as heavy rains, frost or drought.

In the United States, customers range from professional golf tour organizers to travel operators to small farmers.

Friedberg, who was formerly with Google, told Reuters the company was selling contracts to corn farmers in the Midwest, who suffered heavy flooding earlier this year.

With federal crop insurance coverage set to expire at the end of this month, "these farmers have corn on the ground and are not covered for a frost event for the rest of the season and some might have corn through late October," he said.

"We're seeing a lot of corn farmers buying coverage from us for frost from Illinois, Iowa and Minnesota."

MAKING MILLIONS

As a privately held company, WeatherBill does not issue financial statements, but the CEO said it had "made millions of dollars hedging hundreds of millions of dollars in risk."

In the report, WeatherBill says countries with more extreme variations in temperatures as well as higher extractive activity, such as farming and mining, are the most sensitive.

Brazil, the world's largest coffee and sugar producer, ranked top among the 68 economies assessed for weather-related risks while Pakistan's economy ranks the least sensitive.

The study said Brazil was 30 times more vulnerable to weather risks than Pakistan, which "means that a dollar in Brazil will be thirty times more weather-sensitive than a dollar in Pakistan," WeatherBill said.

The market for weather derivatives, as such contracts are also called, was started by now collapsed energy giant Enron about 10 years ago, Friedberg said, but never broadened much outside of the energy utility sector.

As a result, he said that WeatherBill has so far not seen any direct competition online.

"We're primarily a technology company and we've built a platform that allows us to write any sort of weather contract for any sort of business to protect against their specific risks," he said. "We're really trying to bring these products to the masses."

Hedging usually involves taking a position in a futures market that offsets a similar position in the equivalent cash market so that a loss in one is offset by a gain in the other.

(Editing by Marguerita Choy)