If 2017 taught us anything, it would be our inability to adequately predict and prepare for the vagaries of climate-related disasters.
According to data published by NOAA, the fourth costliest hurricane in U.S. history occurred in 2012 with Hurricane Sandy causing damage of $71 Billion.
During the next five years, no major hurricanes made landfall. However, 2017 saw three: 1) Harvey, second costliest $125B, 2) Maria, third costliest $90B, and 3) Irma, fifth costliest $50B.
Still reeling from the costs arising from the unexpected arrival and ferocity of these three major hurricanes, it is not hard to understand how coupling the known, hard costs of 2017, with the projected 2018 costs for natural peril risk, have placed community foundations at a disadvantage in finding the means to meet all necessary obligations.
These facts suggest a fundamental question: is there a financial instrument to mitigate weather risk by using an available, but not well known, market mechanism to provide both risk-transfer and a safe, dependable stream of funding? Wx Risk Global has the solution for all organizations monetarily affected in the form of custom designed weather based derivatives.
Great idea! One might say, “How is this impactful to the community?” As one small example, some Community Foundations are considering answering this question by utilizing weather derivatives as a financial instrument for Program-Related Investments (PRI). Initially, these Foundations have identified three areas to focus their social impact investing efforts: 1. Hurricane damage, 2. Disaster-related housing problems, and 3. Disaster-related transportation problems.
Program-Related Investments (PRIs), are defined by the IRS as, “investments made for the primary purpose of accomplishing a foundation’s exempt purposes rather than producing income or appreciation of capital.” Here, the foundation corpus is lent-out, through a non-profit organization on a self-identified grant basis. The repayment and interest can be devoted to a variety of purposes.
Mission-Related Investments (MRIs), are defined by the IRS as “prudent, non-jeopardizing investments, made by private foundations, that further their charitable purposes even if they offer a somewhat lower expected rate of return than might otherwise be achieved.” Here a minimum return is set for the investment with cash flows designated for an identified mission. When properly structured, both PRI & MRI satisfy IRS requirements for Foundations to acheive tax-exemptions.
Wx Risk Global weather derivatives can be purchased by any organization to protect from financial losses due to volatile weather conditions involving wind, rain, hot/cold temperature extremes, et al. From farmers needing to hedge the value of their crops against drought or flooding, to virtually any business where consumer behavior is linked to the weather. Two specific risks pertinent to Community Foundations are budget uncertainties due to weather related revenue loss, and increased costs to cover the damages caused by catastrophic weather events. Both these risks can be addressed responsibly via weather derivatives, locking in costs and adding security in case of catastrophe.
Suppliers of weather derivatives are typically AAA-rated reinsurance companies and hedge funds interested in diversifying their portfolios with weather risk. Weather derivatives use weather data from reputable third-party sources, for pricing and settlement, to prevent conflicts of interest. Typically, these sources are government weather agencies such as the National Center for Environmental Information (United States).
Furthermore, since every entity subjected to natural peril risk varies by geography and natural resource availability, weather derivatives are customizable to fit the unique needs of every Foundation concerned with mitigating weather-risk. These needs include, but are not limited to: clean water and sanitation, access to energy, agricultural productivity, food security, human rights protection, and generating funds for charitable giving.
As a Dagda Certified Social Impact/Sustainable Company, Wx Risk Global has undergone the certification process including the development of a Dagda White-Paper outlining the Social Impact and Sustainability of their business model. Wx Risk Global is deeply committed to providing knowledge and access to the weather-risk industry to the construction of the most effective weather-risk solutions being made available to everyone.