If corporate America can't control the excesses of Mother Nature, it can at least manage the balance sheet damage caused by them.

That, at least, is what a small number of giant utility and energy providers--as well as the insurance industry and some bankers--hope senior corporate executives will come to believe in the next several years. More specifically, they hope that those companies whose annual sales--and bottom lines--are particularly affected by even modest changes in the weather seasonally will become active participants in a nascent financial marketplace--that of so-called weather derivatives and more traditional insurance contracts, which are designed to transfer weather risks directly into the insurance and reinsurance marketplaces.

Weather derivatives and their related insurance contract cousins are instruments that enable companies to manage the adverse impact of weather conditions such as drought; freezes; wind speeds that are too strong; too much or too little rain; or simply too many days of excessive heat or cold.

The immediate effect of these weather variations might hurt a diverse number of things such as individual product sales; the cost of production and/or the volume of what companies can produce; and the number of customers who walk through the door. Bottom line: Unexpected declines in sales volume and income can be reduced or eliminated, helping to stabilize not only quarter-to-quarter operating results but ultimately the price of a company's stock.

In theory, the market for these new insurance contracts and weather derivatives could be huge. According to one estimate, roughly $1 trillion of the United States' annual $7.6 trillion gross domestic product has significant sensitivity to weather, says Brock Webel, manager of the weather desk at Tempest Reinsurance in Bermuda.

The products should potentially appeal to manufacturers of everything from fur coats and snow blowers to beer, as well as to operators of ski resorts and other outdoor attractions whose sales are directly affected by too much rain, sun, extreme wind forces, and other natural phenomena.

Others could have an equally great interest in these products, such as major construction contractors. Today it's common for companies to work against contracts with municipalities where if they finish a road or new stadium construction early, for instance, they get a bonus; if they finish late, they pay a daily penalty.

Similarly, state transportation agencies have weather exposures: If there is excessive snowfall, for instance, then those state agencies may have to spend more than they've budgeted to have it removed from highways, streets, and other thoroughfares.

Finally, one of the greatest weather derivatives users may ultimately be the agricultural community. Here the possible use of these products is particularly obvious as droughts, freezes, excessive rain, and other weather conditions significantly reduce crop production nationwide. Reportedly the nation's huge agricultural conglomerates--Minneapolis-based Cargill; Decatur, Ill-based ADM, so-called "supermarket to the world"; and ConAgra, based in Omaha, Neb.--have all been in discussions with weather derivatives "market makers" about how they might use the new contracts.

A $5-billion Market

The market for weather derivatives, launched in the fall of 1997, already totals somewhere in the single-digit billions. At the most recent meeting in early November of the Weather Risk Management Association, a new Washington-based trade association, the group's board of directors estimated the market to total about $5 billion, says Lynda Clemmons, vice president of the weather risk management group for Enron Capital & Trade Resources Corp. in Houston.

While no figures exist for the current size of the weather insurance contract market, also launched at about the same time, these contracts have been bought by corporations such as the Toro Co. in Bloomington, Minn., Bombardier Corp. of America, in Wausau, Wis., and Universal Studios in Los Angeles.

In 1998, for instance--following two back-to-back years of low snowfall, in 1996-1997 and 1997-1998--Toro entered into a traditional insurance risk-transfer contract designed to clear out an overbuilt inventory of its snow blowers still in its possession and in the warehouses of its dealers; consumer buyers of snow blowers, which account for about five percent of the company's total sales, were offered rebates of varying magnitudes depending on just how warm the winter of 1998 would have been.

If the snowfall during that winter had been 50 percent lower than the average, for instance, buyers would have received a 50 percent refund; if it had been only been 40 percent of the average, the refund would have been 60 percent; and so on.

Marsh & McLennan Cos. Inc. designed the program; the company's risks were sold directly into the insurance market in a policy written by General Star.

"This was pure insurance transfer, not a very complicated financial program," says David Hennes, director of risk management at Toro. "Today if we wanted to offer a similar program to consumers, we'd probably lay off our risk in the derivatives marketplace, which I think would be a much more efficient way to handle this."

Bombardier entered into a similar consumer rebate-related transaction covering 1998's winter season, taking Toro's advice, managing its risk transfer through the derivatives marketplace. To entice potential buyers of its Ski-Do snowmobiles in 19 Midwestern cities, in October--before the year's actual snowfall was known--Bombardier offered buyers a $1,000 rebate if the snowfall in their areas didn't equal at least half the average snowfall of the past three years. The price of its snowmobiles ranges from $7,000 to $9,000.

Cat Bond Similarities

As insurers, corporate risk managers, investors, and others consider their possible interests in the weather risk management marketplace, a number of comparisons have been made between the almost simultaneous evolution of these new products and those used to manage catastrophic risk covering hurricanes, earthquakes, and other natural calamities.

At first glance, there appear to be a lot of similarities: Simply, both deal with weather-related issues. Beyond that, both offer the potential for corporations to smooth out cash flows; both involve intensive modeling by the same firms working in the cat bond field.

Moreover, the market for both of these arenas was jumpstarted by a single natural event: In the case of the catastrophe marketplace, 1992's Hurricane Andrew; and in the case of weather derivatives, the phenomenon called El Nino.

Says a marketing brochure from Tempest Reinsurance in Hamilton, Bermuda: "The El Nino event of 1998 has served to emphasize the risks that businesses face from the variability of the elements. In some cases, the benefits of El Nino are beneficial, such as a reduction in the intensity and number of Atlantic hurricanes. But more often, less fortunate locations are afflicted with drought, famine or floods."

Below the surface, though, the differences between these two markets may be far greater. Consider:

* The weather risk management marketplace was launched by utility companies and other energy providers, as opposed to the reinsurance industry, which initiated the cat bond market.

This distinction is crucial: The cat bond market was designed to save the insurance and reinsurance industries should one or more disasters occur that would wipe out the industry's capital and potentially bankrupt one or several insurance and reinsurance providers. The weather derivatives and insurance products market, on the other end, has been designed specifically to help corporations hedge risks created by their own customer base and, in the case of utility and energy providers, to provide an important new source of income that may help these industries as they continue to deregulate.

Reinsurers have played a part in the development of this new marketplace, but not for the same reasons they entered the catastrophic marketplace. Most insurers and reinsurers look at weather derivatives as simply another tool to help them diversify their investment portfolios rather than as integral to their future survival, as in the case of cat bond products.