Snow is risky
Headlines involve risk. So it should be no surprise that New England’s latest snow pileup has a risk angle. Budget-busting storm cleanups hit government organizations first. The federal government, states, counties, municipalities, airports and other transportation hubs all have direct costs of cleanup. Of course, they also have regular budgets for snow removal, so it can be said that such costs are not unexpected. But, when the cost exceeds the budget two or three times over, there is detrimental risk and insurance can be purchased by the season, month or individual storm. In fact, many government organizations buy at least some insurance for these unusual seasonal fluctuations. Insurance underwriters, principally in London, have adequate underwriting information, such as detailed weather history of major cities, on which to base their rates. So, the market for coverage is broad and relatively efficient.
When it comes to businesses such as bus companies, airlines, retail stores and restaurants that see a decline in revenue during storms, it’s a different story. These organizations have the option of buying snow insurance that is generally triggered by measurable precipitation occurring within a stated amount of time. But research tells us that companies deterred by weather emergencies usually self-insure these risks rather than opting for business interruption insurance. Why? When losses of this type are both impossible to predict and likely to occur every few years? The answer is unclear. It may simply be that lenders and accountants don’t expect it or that companies just don’t want to pay for it.
Some business services cannot be interrupted without risk of loss. Biotech companies need lab technicians in order to transfer samples from one phase of an experiment to another. Food growers need to ship their produce to end markets. These companies may need to replace efforts normally made during the storm cleanup in addition to redoing parts of their processes that become “spoiled.” Again, there is insurance available for these types of risks but it is not frequently purchased. The market for such coverage is thin and not very efficient. In other words, it may be overpriced due to lack of predictable information by underwriters.
Other delays caused indirectly by weather, including suspended flight schedules or cancelled meetings, are less likely to be insured. Theoretical losses are simply too difficult to quantify ahead of time, yet they are equally real. Snow is risky in many ways. A bit of planning and the use of technology can reduce some of the risk, but for those of us in New England, there will be a lot of risk that is self-insured.
About the Author
Phil Edmundson is the Chairman and CEO of WGA insurance brokers and consultants for businesses with over 30 years in the insurance industry. He manages strategy, talent acquisition and development, and management / acquisitions at WGA.