United grain growers: enterprise risk management and weather risk

United grain growers: enterprise risk management and weather risk

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Article ID: iaor20042091
Country: United States
Volume: 6
Issue: 2
Start Page Number: 193
End Page Number: 208
Publication Date: Jul 2003
Journal: Risk Management & Insurance Review
Authors: ,
Keywords: financial, queues: applications, meteorology
Abstract:

In August of 1999, Mike McAndless, the risk manager of United Grain Growers (UGG), was preparing for a meeting with the firm's chief financial officer, Peter Cox. Mike and Peter had spent considerable time over the past three years with representatives of the Willis Group Ltd., a large international insurance broker, identifying and measuring UGG's major sources of risk. The risk assessment process indicated that, although UGG hedged most of its currency and commodity price risk and purchased insurance against property and liability losses, the firm's earnings still exhibited substantial volatility. This volatility was, in large part, due to the weather, Mike and Peter had to decide whether to retain the risk or shift it to another party using one of two innovative contractual arrangements: weather derivatives or a new type of insurance contract.

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