Managing weather risks critical to profits

Should you manufacture more coats this year than last? How about placing an early aluminum order in case your key supplier runs low due to shipping constraints from cold weather? Perhaps you should hire an appraiser to ensure your buildings are adequately valued and insured in the event tornadoes strike your region. Should you really place that new manufacturing facility in a well-known tornado alley, even though labor costs are low? Whether you are a large or small organization, weather forecasting can assist you in better managing organizational risk.

Weather is critical to the world’s economies. In the United States, the National Oceanic and Atmospheric Administration falls under the governance of the U.S. Commerce Commission, so it is clear that the United States understands the economic impact of adverse weather. And as the world’s weather becomes, according to many scientists, increasingly volatile, the Weather Risk Management Association finds organizations fuel a growing demand for weather risk management tools, including location intelligence such as:

• Geocoding, which predicts risks of storm surge, wildfire, flood and other issues specific to locations, down to the parcel in some instances,

• Long-term weather predictions correlated by industry and location,

• Financial funding mechanisms such as commodities, and

• Weather insurance.

     In addition to traditional insurance purchases to protect buildings in the event of physical damage, how should an organization fund against weather losses? Take this example of the dairy farmer. Much like humans, contented cows like certain temperature ranges, between 30 degrees and 68 degrees Fahrenheit. The higher or lower the temperature, the more a cow’s energy goes toward maintaining consistent body temperature, lessening the energy available to produce milk. This energy drain decreases production and lowers the dairy farmer’s profit margin. By purchasing insurance that pays when temperature fluctuations rise or fall outside certain parameters, the dairy farmer can recoup milk production losses to minimize financial disruption.

       Insurance companies, like Axa, the French insurer, banks like Deutsch Bank, and commodity traders Goldman Sachs’ division, J. Aron & Company, offer innovative financial products to better manage weather risk. And whether or not one believes that global warming has been scientifically validated, global reinsurers have taken the position that global warning is a certainty and risk is underwritten with this in mind. Large organizations that have in the past used the excuse, “Profits are poor because of unseasonably bad weather” may no longer be able to plead this justification when they have failed to plan adequately using all the sophisticated tools now available.

     Smaller organizations can take simple steps to help limit risk. Business continuity plans and emergency response plans are extremely valuable investments in ensuring your business survives a disaster. As part of this planning, ensure frequent and off-site computer backup to minimize data losses. New hires should be familiar with local weather hazards if they are not native to your region. For example, an employee who moves from the Southwest to the Midwest will not know how to react to a tornado threat. If the employee travels on business, provide a counties map so that the employee can respond appropriately to weather warnings.

     Larger organizations should work with their insurance brokers to categorize their risk exposures to determine the most appropriate vehicles to mitigate weather risk.