Now This Is Umbrella Insurance

We're in the homestretch of summer, and my family is squeezing in as much fun as we can. We're staying late at the pool, eating outside more often and chasing the ice-cream truck down the street. I'm also obsessing over the weather, going online to check Doppler maps and 10-day forecasts as I hope for sunny skies. Americans' weather fixation drove NBC Universal, Bain Capital and Blackstone Group to sign a $3.5 billion deal last month to buy the Weather Channel and weather.com. It's a smart bet: with experts predicting that global climate change is making weather more unpredictable, there's reason to believe we'll keep watching.

That's especially true for businesses. According to the Commerce Department, about one third of the U.S. economy is affected by weather. That includes big sectors like energy or agriculture, but plenty of small businesses, too. David Friedberg realized that a few years ago, while commuting from his San Francisco apartment to his job as a top executive at Google. Each day he passed a rental shop called the Bike Hut. "When it was rainy out, the store would literally close down—the guy wouldn't even come in to work," Friedberg says. "I thought, 'That's such a terrible business—whether this guy makes money in any given week is based totally on whether it rains or not'." So Friedberg created a business that might help. He left Google and in early 2007 launched WeatherBill, which helps insulate businesses against the vagaries of weather.

Big insurers have offered weather insurance for decades, primarily to promoters of large events like rock concerts or golf tournaments. During the past decade large financial firms have also begun trading weather-related derivatives. But neither of these options works well for smaller businesses. So drawing on their experience at Google, Friedberg and co-founder Siraj Khaliq built a Web site that automatically sifts through historical weather data to calculate the odds it might rain (or snow, or be too hot or too cold) during a specified period. Customers can play with the variables, choosing how extreme the weather needs to get (down to ten thousandths of a degree), which reporting station (mostly at airports) to use as the bogey and what payout will result if the bad weather comes. The site then instantly prices the contract, which can cover time periods from a few hours to an entire year. Customers don't need to file claims; WeatherBill automatically mails out checks, which are guaranteed by Nephila Capital, a $2 billion reinsurer. Friedberg says hundreds of customers have signed on.

They include golf courses, restaurants with patios, a hair salon—and Clean Car Turnpike, a carwash in Houston. On a good day, the carwash can service 900 cars, but when it's raining, that number may drop to zero. Since last fall, owner Don Palmour has paid about $200 per quarter for a WeatherBill contract. Now if it rains more than 21 days in three months, Palmour receives $500 for each extra day of rain. That wouldn't completely cover his lost business, Palmour says, "but at least it softens the blow." At Flagstaff (Ariz.)Nordic Center, owner Wendell Johnson hedges against the opposite risk: too little precipitation, which will keep customers away from his cross-country ski area. WeatherBill isn't perfect, Johnson says: his premiums are high (nearly $30,000 this year, since he covers his regular revenue, special events and customers' season passes), and the weather at his recording station (an airport 20 miles away) doesn't always jibe with what's outside his window. Still, he says, WeatherBill does reduce the nerve-racking variability of his business.

Due to Federal Trade Commission regulations, WeatherBill offers contracts only to businesses, not individuals. But that doesn't stop consumers from playing around with its historical weather data. Let's say you're spending Labor Day weekend in Cape Hatteras, N.C. Forecasts notwithstanding, what are the historical odds it will rain? With a couple of clicks you can see that those dates have been rain-free in six of the past 30 years. That's hardly a random example. The idea of insuring vacationers against bad weather seems so compelling that in June the online travel company Priceline utilized a WeatherBill contract to offer a promotion called Sunshine Guaranteed. Under its terms, customers who booked a vacation during certain dates received a refund of airfare, hotel and rental-car costs if it rained more than one-half inch during at least half the days of the trip. (Nearly 200 customers received refunds.) CEO Jeff Boyd says customers reported that the guarantee was a big factor in leading them to book vacations, and it cost Priceline less than an ad campaign. That's why Priceline announced last week that it's reoffering Sunshine Guaranteed this month. "We were the first out with this, but only time will tell whether it's something that will be offered by [competitors]," Boyd says.

Friedberg and his team believe it's an approach that will spread. "Our goal is really to get this as broadly distributed as possible, and in some cases it works really well as a consumer product," he says. As the rest of us enjoy these last days of warmth and sun with no guarantee of good weather, we'll have to pack a good book and Scrabble along with the sunscreen—and hope for the best.

© 2008