With commercial properties twice as likely to be at risk of flooding compared to residential properties, Tysers explains why you should consider parametric flood insurance for your businesses’ wellbeing
Flood is a fundamental risk that will usually be covered in a buildings and contents policy.
Some businesses have faced the withdrawal of flood cover by mainstream insurers, or seen punitive restrictions imposed.
In such cases, some clients have opted to take out parametric flood insurance, sometimes known as ‘event-based’ insurance, to either complement or replace the cover offered by their existing policy.
Do you know your flood risk?
- Â Commercial properties are 2x more likely to be at risk from flooding compared to the average British residential property
- Manufacturing, Wholesaling and Logistics are one of the most at-risk categories with 20.7% at risk of flood damage
- Over 1 in 4 of those who have flooded in the past 10 years experienced a prolonged period of business interruption
- Over 436,000 (27%) of commercial properties in Britain have at least a low flood risk; almost 300,000 (18%) have a moderate risk and 236,000 (14%) are at significant risk of flooding.
How does parametric flood insurance work?
Parametric insurance in the construction industry operates differently from traditional insurance policies. It focuses on predefined events for guaranteed payment, unlike traditional insurance, which requires lengthy loss adjustment processes and negotiations.
Parametric insurance in the construction industry operates by utilising predefined triggers linked to meteorological conditions such as flooding, and other risks, ensuring that construction companies receive a guaranteed payment when these triggers are exceeded.
These triggers are specifically designed to address the unique weather-related risks that construction projects face, such as extreme temperatures, windstorms, and other natural disasters.
For example, a construction project in a coastal area prone to hurricanes can secure a parametric insurance policy that pays out a predetermined settlement once wind speeds reach a certain level. This proactive approach enables the construction firm to effectively manage the financial risks associated with potential windstorm exposure, providing them with the necessary funds to address any resulting damages or delays.
Moreover, advancements in technology have enhanced the precision of parametric insurance by addressing basis risk, which refers to the potential for a mismatch between the actual loss suffered and the payment received.
By leveraging sophisticated data analytics and modelling, parametric insurances can now be tailored to specific risk locations, allowing for accurate and targeted coverage for construction projects in diverse geographical areas.
This capability ensures that construction companies can confidently address their unique weather-related risks through parametric insurance, further solidifying its value in the construction industry.
What are the benefits of parametric flood insurance?
Parametric insurance offers a range of benefits to construction companies, particularly in addressing the increasing risks posed by extreme weather events such as flooding, and the growing demand for new approaches to manage, mitigate, or transfer weather-related risk in the construction industry.
This essentially means that construction companies can benefit from faster payouts and a more straightforward claims process.
For instance, if a construction project experiences a work stoppage due to extreme weather, a parametric insurance policy with a predefined trigger for such an event would allow for a rapid payout, helping the company manage the financial impact of the disruption.
For example, a construction company may experience work stoppages or supply chain disruptions due to extreme weather conditions.
In such cases, parametric insurance can provide a quick injection of funds without the need for lengthy loss adjustment processes, thus ensuring that extreme weather events do not result in significant financial losses for the company.
As a result, approximately 90% of parametric claims are fully paid and settled within 3 weeks, alleviating financial strain on construction companies and enabling them to resume operations or address any supply chain disruptions promptly.
For instance, in the event of a severe weather-related work stoppage, a construction company can receive a timely payout based on predetermined triggers, providing them with the necessary financial support to cover ongoing expenses and mitigate the impact of the disruption.
One of the other key advantages of parametric insurance in the construction industry is its ability to provide accurate forecasting of insurance costs for construction projects. This is achieved through the use of advances in data, which play a crucial role in developing precise parametric insurance covers. By leveraging definitive, objective, and independently verified information, construction companies can tailor their coverage to specific needs, ensuring that they are adequately protected against weather- related risks and other potential disruptions.
Furthermore, parametric insurance can also offer additional protection for construction companies by addressing risks beyond weather-related events. For instance, it can help mitigate the financial impact of pandemics and terrorism by filling gaps in traditional coverage, thereby providing construction firms with comprehensive risk management solutions.
This additional layer of protection can be invaluable in safeguarding the financial stability of construction projects, especially in the face of unforeseen and complex risks that may not be fully covered by traditional insurance policies.
Therefore, the flexibility, speed, and comprehensive coverage offered by parametric insurance make it a valuable risk management tool for construction companies, enabling them to navigate various challenges and uncertainties with greater confidence and financial security.
Overall, the combination of accurate forecasting, tailored coverage, and expedited claims settlement positions parametric insurance as a valuable risk management tool for construction companies, offering them a reliable and efficient way to manage various risks and ensure business continuity.
How much does parametric flood insurance cost?
The predefined trigger and settlement amount will be the main factors that determine the cost of your policy, alongside your potential risk exposure.
Investing in measures to reduce the potential impact of these meteorological conditions may also result in lower premiums.
For example, Flood Resilience measures can reduce the risk of flooding, and the potential damage to sites, property, equipment and materials at lower flood levels. These measures may allow the policyholder to select a higher flood trigger depth resulting in a lower premium.
Taking measures to reduce the financial impact of flooding, such as ensuring, if possible, that machinery and materials are removed from site or raised above ground may also enable the policyholder to select a lower settlement amount and or higher trigger depth.
Examples of parametric insurance in construction
In a recent case study, a construction company successfully utilised a parametric insurance policy to replace conventional coverage for windstorm exposure.
The case study illustrated how the parametric policy provided faster payouts and more flexible coverage, highlighting the potential benefits and advantages of parametric insurance for construction projects.
This successful application of parametric insurance in mitigating weather-related risks underscores its practical relevance in the construction industry, especially in managing extreme weather events and their potential impact on construction projects.
Furthermore, parametric insurance has been instrumental in addressing the issue of underinsurance of natural catastrophe and climate risks in the Caribbean.
By offering tailored coverage and streamlined claims processes, parametric insurance has proven to be an effective risk management tool in diverse geographical locations. This example underscores the adaptability and relevance of parametric insurance in addressing specific weather-related risks faced by construction companies in different regions.
Additionally, there is a noticeable trend of construction firms and developers integrating parametric-based products for additional protection against weather-related risks.
This growing trend signifies the industry’s recognition of the value of parametric insurance in managing and transferring weather-related risks. By embracing parametric insurance construction companies are proactively seeking innovative solutions to safeguard their projects from potential financial losses due to extreme weather events, work stoppages, and supply chain disruptions.
In summary, parametric insurance has emerged as a valuable risk management tool for construction companies, offering a unique and effective way to address weather-related risks.
By providing tailored coverage, faster payouts, and additional protection against various perils, parametric insurance has become increasingly relevant in the construction industry.
For example, a case study demonstrated how a parametric policy could replace traditional coverage for windstorm exposure, showcasing the potential benefits and advantages of using parametric insurance for construction projects.
This example illustrates the practical application of parametric insurance in addressing specific weather-related risks faced by construction firms, highlighting its ability to provide targeted coverage.
Furthermore, parametric insurance can help with pandemics and terrorism by filling gaps in traditional coverage, offering an additional layer of protection for construction companies against various risks. This flexibility and adaptability of parametric insurance makes a valuable asset for construction companies, allowing them to effectively manage and mitigate weather-related risks while ensuring financial stability during challenging times.
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