Weather Value at Risk: On the Measurement of Noncatastrophic Weather Risk

An evaluation of weather risk entails two important objectives: indicating the economic impact of weather variability and climate change, and evaluating the use of weather derivatives in weather risk reduction and climate change adaptation strategy. This paper illustrates a straightforward approach for measuring weather risk, which captures both the exposure and the sensitivity of business and economic indicators to weather variability. Using the example of the accommodation industry in Kitzbuehel (Austria), it is demonstrated that the risk measure Weather-VaR can be used to serve both ends. It is found that compared to a normal climatological season, adverse snow conditions (at the level of a 1 in 20-yr event) result in a substantial financial loss of approximately 4 million euros. However, results show that quantification of weather risk is substantially affected by the choice of the weather variable or index, the time period under consideration, the model specification for estimating the sensitivity parameter, and whether time trends are considered when estimating the probability of unfavorable weather conditions.