Published February 14, 2014
While there are clear links between bad weather and economic performance, Allianz put its foot down once and for all on Friday, saying it’s time companies stop blaming snow for lackluster earnings growth.
The insurance giant says blaming poor sales on the weather is becoming a “poor excuse,” particularly as the direct cost of weather volatility around the world rises significantly.
Insurers paid out $70 billion annually for damages from extreme weather in each of the last three years, much higher than the $15 billion they doled out for weather woes in the 1980’s.
“However ‘bad’ the weather is, it is no longer a good excuse for disappointing earnings,” said Karsten Berlage, global head of weather risk management at Allianz Risk Transfer.
Coca-Cola (KO) and Wal-Mart (WMT) are just two of the many retailers that have had weather take the fall for weak earnings and outlooks in the past. Wal-Mart, the world’s largest retailer, last month trimmed its fourth-quarter earnings guidance, specifically citing the extreme cold temperatures.
Of course, many customers are deterred from shopping during adverse whether events. Cold weather and snow also hinders the ability for key infrastructure and transportation systems (look no further than UPS (UPS)) to function normally, and economists this week even readjusted their growth prospects on the U.S. economy, citing the weather.
However, the insurance industry, on the hook for billions of dollars in weather-related claims, is getting fed up with the whole thing and wants people to buy better protection and take common-sense precautions ahead of severe events.
“While companies cannot be expected to control the weather they are now expected to better control the risk of its financial impact,” Berlage said.
With access to weather data improving dramatically over the last decade, it has become imperative that companies adopt weather-risk management tools and protocols, she said. Insurers have invested heavily in weather products over the last 10 years and believe it’s time clients start to do the same.
A lot of it comes down to pre-planning, says Jon Hall, executive vice president, FM Global, which provides property and commercial insurance to 33% of Fortune 1000 companies.
FM Global has a 1,600-acre research campus in West Glocester, R.I. where it mimics real-life scenarios involving fires, explosions, hurricane-force winds and flying debris. It brings clients into the facility to survey potential damage themselves, or sends employees into the field to help companies better prep for potential lights-out scenarios.
“We work very hard to understand what can go wrong,” Hall said.
Much of the problem, he said, is that executives don’t think it could happen to them. In an FM Global survey from 2008, just 20% of executives believed disasters could negatively affect their bottom line. In a more recent survey it released on Thursday, 41% of employees expressed concerns their company did not have adequate emergency plans to keep the business going under severe weather events.
“There’s an interesting disconnect there,” Hall said.
Yet, FM Global’s clients that took proper precautions ahead of Hurricane Sandy in 2012 only had about 25% of the financial impact compared with its clients who did not properly prepare. Even the simplest things helped, such as moving valuable equipment out of the basement and off the floor.
“There were huge financial implications with Sandy and numbers were dramatic when people were ready, thought it through, and had a plan,” Hall said.
Perhaps executives can take a lesson from the drug industry.
Some pharmaceutical companies that make active ingredients offshore in Puerto Rico now ship several months’ worth of it in bulk to their facilities in the U.S. ahead of hurricane season to protect against potential weather-related disruptions.
While they are operating in a risky place such as Puerto Rico for the tax benefits and cheaper costs, Hall says the sector has also recognized the weather-related hazards and are doing what they can to ensure hurricanes don't weigh on their bottom lines.