“Companies said, ‘We can’t be going $10 million or $15 million over budget every time there’s a bad year,’ ” said David Salnave, who overseas landscaping and snow removal for JLL. Salnave wanted to help his clients cope with budget-busting snowfall.
At that time, a team of meteorologists, financial experts and data scientists at reinsurer Munich Re were developing a new technology for gauging weather risk at local levels. They worked with Salnave to solve the budget problem, sorting through massive reams of data on weather, climate and local geography to assess the probability that snowfall would bury his clients’ buildings and parking lots and drive up the cost of plowing. They then determined the likelihood that plowing costs would exceed a company’s budget in any given year, and they put together a financial program that would cover them if that happened.
The team saved Salnave’s clients millions and went on to found a new firm, the Demex Group, that is helping companies navigate weather risks, which are looming larger because of climate change.
“Look at the last 10 years of snowfall on the East Coast. You’re going to see some of the highest years and some of the lowest years across the hundred-year record,” said Steve Bennett, co-founder and managing director of Demex, which is based in Washington. “If weather won’t provide companies consistency from year to year, the products we provide will, because they know their revenues or their costs can be fixed.”
When it comes to weather, companies have limited means to guard against smaller risks. Munich Re and firms like it insure companies against catastrophic risks — like Category 5 hurricanes — that could bankrupt them. Weather derivatives, a risk-hedging tool, offer protection against seasonal disruptions. A power utility might buy a derivative that pays out if summer temperatures are lower than expected, meaning people use less air conditioning and, thus, less power. At the smallest level, however, companies have had little way to prepare for an actual rainy day.
Imagine a convenience store near the beach that gets a big part of its yearly business on the Fourth of July, Bennett said. If it rains that weekend, and would-be customers stay home instead of going to the beach, that hurts the store’s bottom line. Here, Munich RE saw an opening.
A decade ago, the company set out to assess highly specific, highly localized weather risks. That could mean helping a convenience store guard against the possibility of rain on its biggest weekend of the year, or it could mean helping a supermarket chain budget for snow clearing at its stores.
“If you’re the property owner, we can model what plowing will cost, or if you’re the plow supplier, we can model what your revenue will look like and try to take the variability out of both peoples’ experiences,” said Ed Byrns, president and CEO of Demex.
This new venture represented such a departure from Munch Re’s core business that Demex became its own company in December, though Munich Re remains a partner, along with Nephila Capital, which invests in weather risk management ventures. On Tuesday, Demex recently announced $4.2 million in seed funding from venture capital firms Anthemis and IA Capital Group.
Bennett said their technology was made possible by more refined weather modeling as well as the advances in computing that gave rise to higher resolution models. More powerful computer models have allowed Demex to process vast sums of data, making the tens of millions of calculations needed to produce such tailored assessments.
Necessity also helped birth this invention. Climate change is producing a world of more extremes, posing a threat to businesses. Tropical Storm Isaias offers one recent example. Con Edison, which supplies electricity to the New York City area, reported the second-largest outage in the company’s history as powerful winds downed trees and power lines.
A company that was previously able to survive the ups and downs of weather might struggle to do so today, creating an opening for new firms, like Demex, that could help the company protect against escalating risks.
“One thing we know is that climate change is making everything more volatile,” Byrns said. “Climate resiliency means creating a shock absorber for climate change. And we hope to be that shock absorber.”