In theory, weather derivatives can help smooth out the annual ups and downs of resort revenues. But in practice, many areas find that these tools are complex and not as predictable as they would like.

The concept: an originator agrees to a certain premium, and in return promises to make payments to the resort if certain conditions are met. In practice, derivatives are somewhat expensive, and it’s difficult to figure out what aspects of weather correlate well to visits and revenue. Then there’s the issue of finding a nearby weather station with a long and reliable history (30 years of uninterrupted data is the standard) that also correlates very closely with the resort.

Steven Seel of Horizon Weather Group says resorts have been slow to sign on, for good reason. “We have found that the derivative concept has to be developed. The way the market is structured, it’s based on temperature. We need better data on precipitation.” Working with some Eastern areas, his company has made progress on that front and is looking for ways to suit resorts’ needs.

Ironically, the good snow year just past puts areas in a position to purchase derivatives for next year. “Snow was pretty good all over,” says Jeff Hamlin of Weatherbill. “But what if next year isn’t so strong? People face different pressures every year.”

Crystal Mountain, Mich., is one area that has investigated derivatives. “Having been in the insurance business, I understand how it works,” says president Jim MacInnes. “The originators and brokers have to build in profit, hire people, do research. If you do it every year, those guys are gonna make money.

“The good news is, if you need that stability and can afford to pay for it, you can stabilize your earnings.” As for Crystal, he says, “we have self-insured for weather by diversifying into other businesses and summer activities.”

“The risk premium can be substantial,” says Mark Petrozzi, risk manager for Booth Creek resorts. “Two years ago, I determined I was going to hit on some kind of a claim once every 20 years or so. But pricing reflected about once every seven years. I don’t mind paying a premium, but not three times.”

And then there is the current lack of “transparency” in the derivatives market, which is tied to the overall credit market. Even in the best of times, originators have been known to disappear.

In the end, it comes down to this: would the money be better spent, for example, on high-efficiency snowguns, or on a weather derivative? There is no simple answer.