In truth, we can do little about either the weatherman or the weather. Risk managers find themselves in similar straits. They cannot control Mother Nature, but their companies can be buffeted by extreme weather. Indeed, such phenomenon can deliver devastating — perhaps crippling — financial hits.

Risk professionals can no more manage weather than they can manage time. We all are subject to the weather just as we all have only 24 hours in a day (though some attorney bills tell me otherwise!). Although we cannot control or manage the weather, we can control (somewhat) and manage our response to the weather in ways that cushion the financial shockwaves that rock our world when floods, hurricanes, or tornadoes hit. Determining the specific steps to take to counter the blow is the essence of risk managing weather perils.

Climate changes happen incrementally, like the fable of the boiling frog — if you drop a frog into boiling water it will jump out. If you notch up the temperature degree by degree, though, it will linger in the pot until it reaches a boil. (Easy, PETA folks, this is just figuratively speaking; no frogs were boiled in the preparation of this article.) These changes will not be as rapid as in the movie, The Day After Tomorrow, where a global weather calamity moves in and the world is saved in a week or so.

Since weather is difficult — if not impossible — to “manage,” the best course: Follow the Boy Scout motto, “Be Prepared.” If your business or organization is in the Midwest or Northeast, prepare for snow. If it is in the Southeast, prepare for hurricanes. If it is in the West, prepare for earthquakes.

According to Dave Riggs, risk manager for Asplundh Tree Expert Company, a wise time investment for most companies lies in preparing business continuity and emergency response plans. “Look at Wal-Mart after the hurricanes,” Riggs says, “They were able to re-open stores weeks before others.”

Weather: a Convenient Excuse?

James Brittle of McGriff Seibels and Williams (Birmingham, Ala.) says that in his discussions with companies and in reviewing financial reports, many companies think that weather impacts their financial results and/or there is a seasonal aspect to their revenues, but little documented evidence exists. Outside of the energy industry, he notes, few companies have done any statistical/actuarial analysis to truly correlate any effect of weather on revenues.

Extreme weather is not just a warm phenomenon. Ask yourself what the latest snow squall did to the operation of your business or to local stores. (When I worked for a claim TPA, workers joked that the executives did rain dances, praying for extreme weather!) Corporations may too eagerly blame extreme weather to rationalize sub-par financial results. Historically, Wall Street has given free passes to firms citing bad weather as a reason for lagging financials. Over 120 corporate regulatory filings in the second half of 2005 included the term “unseasonable.” Whether you sell power saws (Sears) or sodas (Coke), you can blame lagging sales on the weather.

Further, time may be coming when companies — and risk managers — no longer get free passes for using the “bad weather” excuse. According to AIR CEO Karen Clark, “If there is a way to manage it, it should be managed.”

Weather is a risk problem, especially for companies operating on “just in time” delivery, where storms or other natural disasters can delay shipments and shut down manufacturing facilities for weeks. In such situations, “contingency loss” business interruption insurance is wise. If you are like Dell Computer and outsource manufacturing of some components to, say, Indonesia, you are vulnerable to tsunamis and weather there, not just heat spells in Austin. Bad weather has a global reach and business interruption implications due to global outsourcing.

Tweaking Disaster Recovery

Telus Corporation is a telecommunications firm headquartered in British Colombia. It noticed the effects of climate change on its operations and on its disaster recovery plans after suffering 100-year floods in its operating area in the past two years. Its director of corporate insurance and claims, Steve van Halst, notes that natural catastrophe models are premised on the world as it existed 30 years ago. As we know, the world since then has changed significantly, particularly with regard to climate changes and patterns. North America is increasingly experiencing flash floods. Additionally, windstorms and hurricanes are not only more frequent, but they pack a bigger punch. One-hundred-year events seem to be occurring every other year, if not more frequently.

We can debate the causes of such phenomena — whether this is due to global warming, the burning of fossil fuels, aerosol spray cans, widening holes in the ozone layer, or melting of polar icecaps. Nevertheless, risk managers must devise plans to address the growing volatility of weather-related risks while the world's politicos meet and try to figure out how to forestall global calamity. More and more, insurance companies, reinsurance companies, and risk managers must ratchet up their focus on low probability high-stakes events such as floods, earthquakes, ice storms, and windstorms. These affect not only big players like insurance companies and reinsurance firms, but almost every organization as well.

Increasingly, companies are not relying on any blow-dried weatherman on Channel 4 for their climate forecasts. An increasing number are turning to professional weather forecast firms. The latter are proliferating. There are now roughly 80 weather-related risk consulting firms nowadays, compared to a handful a few years ago. Companies such as Staples, the Gap and J.C. Penney use their services. Investment brokerage house Schwab uses computerized weather modeling to identify lower risk areas in which to locate their branch offices.

Some larger organizations have internalized weather monitoring. For example, FedEx employs 14 meteorologists in its Memphis headquarters to predict the weather. FedEx may be the exception, but it is not alone. UPS has its own weather specialists, as do some agricultural and energy firms. Ninety nine percent of companies cannot afford that kind of expense.

Even if risk managers cannot control the weather, they can do much more than just wring their hands. With one eye on the forecaster and another on their toolbox of mitigation and financing tactics, risk managers can help their organizations ride out the storm.

Kevin Quinley CPCU, AIC, ARM, is senior vice president of Medmarc Insurance Group in Chantilly, Va. He can be reached at [email protected].