Mother Nature Insurance

Defense Secretary Robert Gates, left, accompanied by Secretary of State Condoleezza Rice, tells reporters it remains unclear how long the "temporary" U.S. military buildup ordered by President Bush in Iraq will last, Thursday, Jan. 11, 2007. AP Photo/J. Scott Applewhite

When the Corney Barrow chain of wine bars in London's financial district noticed that bad weather was cutting into their business, they bought some protection.

"We ended up taking a weather derivative,"said Sarah Heward, managing director.

What's a weather derivative? As CBS News Business Correspondent Anthony Mason reports, it's a new kind of insurance against business losses inflicted by Mother Nature.

"The El Nino winter of a couple of years ago is something that really kicked this market off," said Peter Barker of the Chicago Mercantile Exchange.

It's already a $5 billion market. Weather derivatives are even traded on the Chicago Mercantile Exchange.

"There's a lot of money at risk that depends on what goes on with the weather," Barker said.

In fact, trillions of dollars are at stake — some estimates say that 20 percent of the U.S. economy revolves around what the weather does or fails to do.

For example, the Corney Barrow chain's busiest nights are Thursdays and Fridays, especially during the summer, so Heward reserves those nights for her weather derivative insurance. Her company pays a premium and receives the insured amount to cover its losses if on those nights the weather is worse than average.

"Well, I'm certainly glad I've got it," Heward said.

So far, electric companies have been the biggest derivative buyers. Temperature swings can cost them a lot of money. Employees of Weather 2000, which specializes in long-range forecasts, believe the market will grow.

Unlike regular insurance, derivatives do not cover catastrophic events like hurricanes and tornadoes, just unseasonable swings in temperature or other conditions.

Some businesses are uncomfortable even with the name, but Meteorologist Bob Dischel that discomfort will fade eventually.

"Where there's a need …The market will find a way, I'm convinced," he said.

Weather derivatives are also an option some businesses cannot afford to pass up.

"It is very hard to then stand up in front of your shareholders and say my profits are down because of the weather, but I didn't do anything about it," Heward said.


©2000 The Associated Press. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed
  • CBSNews.com staff CBSNews.com staff

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