Mitsui Sumitomo Insurance will soon launch a product worldwide that covers damage caused by particular weather conditions. The insurer expects that the plan will encourage companies to expand into regions that are vulnerable to drought and other severe conditions, particularly in emerging economies in Southeast Asia.The Japanese insurer has partnered with NASA to develop the product, collecting detailed weather data available from the U.S. space agency's satellites, such as surface temperatures and the spread of damage from floods.
The product applies a concept called "weather derivatives" to guarantee that policyholders will receive a payout based on previously agreed-upon conditions regarding temperatures, rainfall and other weather-related factors. It will target companies whose earnings could be significantly affected by weather -- for instance, manufacturers whose factory operations could be suspended by storms, or power utilities that could be hit by cold weather during summer.
In Japan, weather-linked insurance products are becoming popular as an add-on to fire and earthquake insurance. In emerging economies, however, a lack of weather data has been an obstacle to precisely calculating premiums.
Mitsui Sumitomo Insurance has managed to commercialize its new product by leveraging detailed data from NASA, as well as expertise from a U.S. insurer it bought, which specializes in weather derivatives.
If weather-linked insurance policies become widely available in emerging economies, companies will be able to better project productivity based on the anticipated locations of factories or farms. This could increase the potential locations in which these companies could expand.