Weather and Finance

The financial system is complex and, to a certain extent, chaotic. Here at Web-Empire we feel that those doing the financial modeling failed to predict the current economic crisis (aka the “credit crunch”) due to several factors.

One of these factors is the weather and though we would like to think it no longer impacted on our wellbeing as it did in the days of old when a bad summer meant you would starve in the winter, it would appear this is not the case.

But we all sit inside offices to work and we have food from all over the world and we are not starving here in the West so how is the weather affecting business?

Any Fire Officer will tell you that businesses whose main site is affected by, say, flood or fire generally does not survive the two years afterwards. The cost of such disasters, especially for small and medium sized businesses, is catastrophic. Even if they are insured, even if they do have off-site back ups of all their information. Many businesses do not think and keep copies sometimes right next to the original or master.

Now one or two businesses being wiped out by a fire and the fact that they may go out of business two years afterwards means that the financial system can survive this. But large storms can affect whole regions or districts and a good proportion of the buildings hit will be business property. The amount of time taken up in sorting the mess out – getting the insurance company to pay out and the work done (here at web-empire our personal experience says that getting the builders in is more of an issue than getting the insurance payout). This all eats into company time; and then what if half the employees of a company have been hit personally? They will need time off to sort their own affairs out and may even be traumatised by extreme events.

Even moving to other premises is time consuming and costly to businesses, both financially and in human resources.

Floods and wild fires can be equally as devastating and often one form of extreme weather can spark off another – ie storms and floods. Gloucestershire came to a complete halt in 2007 when large regions of the UK flooded that year. Many properties flooded including the Promenade in Cheltenham that has many shops on – including the bookshop that one of our team was going to for the launch party of the last Harry Potter book. Some buildings are still under repair at the time of writing (early 2009).

Power was down in some places due to a sub-station being flooded and drinking water was contaminated for similar reasons. This meant that huge chunks of the county were relient on water shipped in from other counties in tanks they sat on the road side. Few businesses could work – health and safety meant that most catering places had to close and with no running water toilets in offices would be an issue too.

Such events would at least put strain on the local economy.

The recent snow is another example. People could not get out to shop, at least in the villages, but more importantly a lot of them could not get to work and though the internet is a marvelous thing it can not compensate for everything.

London was even brought to a grinding halt – large chunks of the Underground weren’t running, buses stopped and roads were impassable. Universities canceled lectures, schools closed, tourist attractions had few visitors and people simply could not get to work. There were more road accidents and the like.

Extreme weather also hits the insurance companies as they struggle to pay out more people in one hit than they are designed to cope with. Insurance relies on paying out say 1 in 10 people who pay insurance leaving the excess for investment. If they are suddenly paying out 9 out of 10 people then there is no excess and sometimes not enough to cover costs. This hits the financial sectors again this time from an investment side.

We here at Web-Empire feel that their may well be a more significant link between the weather and economy – just the number of businesses affected would surely have a knock on effect. Weather is also a chaotic system meaning that predicting what is going to do next is actually very difficult and the further into the future you go the more uncertain things become until preditions are worse than useless. If there is a strong link then it would mean that there is at least a chaotic factor in the financial world and that would need to be addressed in the models or at least in how the models are used.

1 Comment(s)

  1. Pingback by Snell-Pym » The Weathers Impact on February 16, 2009 3:13 pm

    […] here are my mad ramblings on the subject of weather and the financial world – it is a topic that I will investigate furthure […]

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