Topper Shutt is the unlikely name for a lead TV weatherman inthe Washington, D.C. area where I live. My family calls him “TopperShutt Up.” We grit our teeth as he prattles about barometricpressure, jet streams, and Doppler Radar. We don't need to know thedew point in Dubuque, Iowa, for goodness sake! Can't we just cut totomorrow's forecast, followed by tonight's sports scores?

Only those living in a cave (climate controlled) have notnoticed that weather lately seems more extreme. Six hurricanes hitthe United States in 2004, the most in nine years. According toreinsurance giant Swiss Re, nine of the 10 hottest years on recordhave been in the past decade. Coincidence? Unlikely. Hurricanes in2004 levied a financial toll estimated at $56 billion. In 2005, thetab rose to $80 billion. Europe's monster heat wave of 2003 costeconomies an estimated $20 billion. According to research conductedby MIT climatologist Kerry Emmanuel, hurricanes have grown doublyintense in the past 30 years, coinciding with ocean warming.

Funky weather is at a record high. The year 2005 brought 27major storms, eclipsing the prior record of 21 set in 1933. Fifteentropical storms morphed into hurricanes, breaking the previous highof 12 in 1969. More tropical storms and major hurricanes haveoccurred since 1995 than in any other 10-year span in recordedhistory. Max Mayfield, director of the U.S. Hurricane Center says,“The bad news is that research meteorologists tell us we're in anactive period that may well last another 10 to 20 years.”

Weather Effects Can Be Managed

In truth, we can do little about either the weatherman or theweather. Risk managers find themselves in similar straits. Theycannot control Mother Nature, but their companies can be buffetedby extreme weather. Indeed, such phenomenon can deliver devastating— perhaps crippling — financial hits.

Risk professionals can no more manage weather than they canmanage time. We all are subject to the weather just as we all haveonly 24 hours in a day (though some attorney bills tell meotherwise!). Although we cannot control or manage the weather, wecan control (somewhat) and manage our response to the weather inways that cushion the financial shockwaves that rock our world whenfloods, hurricanes, or tornadoes hit. Determining the specificsteps to take to counter the blow is the essence of risk managingweather perils.

Climate changes happen incrementally, like the fable of theboiling frog — if you drop a frog into boiling water it will jumpout. If you notch up the temperature degree by degree, though, itwill linger in the pot until it reaches a boil. (Easy, PETA folks,this is just figuratively speaking; no frogs were boiled in thepreparation of this article.) These changes will not be as rapid asin the movie, The Day After Tomorrow, where a global weathercalamity 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 yourbusiness or organization is in the Midwest or Northeast, preparefor snow. If it is in the Southeast, prepare for hurricanes. If itis in the West, prepare for earthquakes.

According to Dave Riggs, risk manager for Asplundh Tree ExpertCompany, a wise time investment for most companies lies inpreparing business continuity and emergency response plans. “Lookat Wal-Mart after the hurricanes,” Riggs says, “They were able tore-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 reviewingfinancial reports, many companies think that weather impacts theirfinancial results and/or there is a seasonal aspect to theirrevenues, but little documented evidence exists. Outside of theenergy industry, he notes, few companies have done anystatistical/actuarial analysis to truly correlate any effect ofweather on revenues.

Extreme weather is not just a warm phenomenon. Ask yourself whatthe latest snow squall did to the operation of your business or tolocal stores. (When I worked for a claim TPA, workers joked thatthe executives did rain dances, praying for extreme weather!)Corporations may too eagerly blame extreme weather to rationalizesub-par financial results. Historically, Wall Street has given freepasses to firms citing bad weather as a reason for laggingfinancials. Over 120 corporate regulatory filings in the secondhalf of 2005 included the term “unseasonable.” Whether you sellpower saws (Sears) or sodas (Coke), you can blame lagging sales onthe 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 disasterscan delay shipments and shut down manufacturing facilities forweeks. In such situations, “contingency loss” business interruptioninsurance is wise. If you are like Dell Computer and outsourcemanufacturing of some components to, say, Indonesia, you arevulnerable to tsunamis and weather there, not just heat spells inAustin. Bad weather has a global reach and business interruptionimplications due to global outsourcing.

Tweaking Disaster Recovery

Telus Corporation is a telecommunications firm headquartered inBritish Colombia. It noticed the effects of climate change on itsoperations and on its disaster recovery plans after suffering100-year floods in its operating area in the past two years. Itsdirector of corporate insurance and claims, Steve van Halst, notesthat natural catastrophe models are premised on the world as itexisted 30 years ago. As we know, the world since then has changedsignificantly, particularly with regard to climate changes andpatterns. 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 beoccurring every other year, if not more frequently.

We can debate the causes of such phenomena — whether this is dueto 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 thegrowing volatility of weather-related risks while the world'spoliticos meet and try to figure out how to forestall globalcalamity. More and more, insurance companies, reinsurancecompanies, and risk managers must ratchet up their focus on lowprobability high-stakes events such as floods, earthquakes, icestorms, and windstorms. These affect not only big players likeinsurance companies and reinsurance firms, but almost everyorganization as well.

Increasingly, companies are not relying on any blow-driedweatherman on Channel 4 for their climate forecasts. An increasingnumber are turning to professional weather forecast firms. Thelatter are proliferating. There are now roughly 80 weather-relatedrisk consulting firms nowadays, compared to a handful a few yearsago. Companies such as Staples, the Gap and J.C. Penney use theirservices. Investment brokerage house Schwab uses computerizedweather modeling to identify lower risk areas in which to locatetheir branch offices.

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

Even if risk managers cannot control the weather, they can domuch more than just wring their hands. With one eye on theforecaster and another on their toolbox of mitigation and financingtactics, risk managers can help their organizations ride out thestorm.

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