By Robert Holmes
Snow insurance has been around for decades, primarily in the ski resort industry. In recent years, however, snow removal companies have been the dominant purchasers. Its use in the snow & ice management industry has been growing steadily. However, procurement was at unprecedented levels as we headed into the current winter.
This uptick may be attributed to several reasons: an increased awareness and understanding of snow insurance and its availability; greater pressure to provide one type of contract vs. another; financial stress caused by snow conditions experienced in previous year(s); or a decision based on seasonal snowfall predictions. Unlike winters past, this winter also has seen a second wave of insurance purchases in January by those seeking new or additional coverage.
Identifying the risk
Broken down to its basic elements, revenue equals price multiplied by volume. A snow removal contractor can set his price for services, but the amount and/or frequency of snowfall will determine the volume of service that is performed and, therefore, determine the amount of revenue acquired during the course of the winter season. In this context, snowfall is referred to as a volumetric risk. With regards to a seasonal contract, setting of the price includes the expenses associated with expected snowfall. As snow totals exceed the expected value and expenses grow, the price set for that contact is no longer profitable. Snowfall is the most significant variable over which a contractor has no control, and may be the single greatest risk to a company’s financial success.
As of this writing, much of the country has seen above-average snowfall totals, particularly in the Great Lakes, Midwest and Northeast regions, where many locations have seen snowfall at two and, in some cases, three times expected levels. The profitability of seasonal contracts has been threatened for many snow removal professionals in these areas. Those that have purchased excess snow coverage are able to better cope with any financial issues should the snowy trend continue.
Snow insurance options
Snow insurance is a class of weather insurance that pays a claim if certain snow characteristics are met. Policies can be designed to address either excessive or lack of snowfall. Snow insurance is purchased with a coverage period that mirrors the snowfall season in the insured’s geographic area of interest, and has a claim amount that is determined by the occurrence and/or magnitude of natural snowfall.
Snow insurance policies are tailored to the needs of each individual insured. Snow insurance can be broken down into two basic categories: those that pay a claim for excessive snow, and those that pay a claim for a lack of snow.
Excess snow insurance policy. Snow removal contractors that have secured a large number of seasonal contracts may be exposed to a winter with excessively high amounts of natural snowfall, which may cause those contracts to become revenue-negative when the expense to provide the promised services begins to exceed the payment received. For such an exposure, an excess snow insurance policy can be used to address that risk.
Lack of snow policy. For those companies that have a majority of per-push-type contracts, a lack of snow policy can provide the financial backstop against a winter with significantly low snowfall totals relative to the average conditions in their service area. This is also the type of insurance used by deicing product companies whose revenues depend on the consumption of salt and other chemicals.
Snow insurance helps address the financial risk associated with variances in natural snowfall. Proper planning is a necessity, and an attempt to balance contracts can provide a layer of protection; however, that may not always be achievable or may only be met by discounting one type of service over the other. But as we are witnessing this winter, snow insurance can be a powerful tool to have in your risk management toolbox.
- Policies can be tailored for excessive or lack of snow.
- Proper contract balance can help even the risk of winter volatility.
- Contractors are playing catchup with midseason snow insurance purchases
Robert Holmes is a meteorologist, founder and president of Spectrum Weather and Specialty Insurance.