Parametric products can reduce the weather risk faced by construction companies
We all know the delays that weather can cause to projects – whether it is heavy rain, snow and ice, or extreme temperatures that make working conditions dangerous.
Construction companies normally manage the risk by building in contingency time, or insuring against catastrophic business interruption scenarios.
But there is an alternative: parametric insurance.
Insurance for all weathers
Parametric insurance solutions have emerged as project owners pass more weather risk on to contractors – who are themselves trying to stay competitive.
A parametric policy is triggered when a weather event causes a delay and subsequent financial loss for a contractor. The insurance market uses historic weather data to work out, for example, the likelihood of cranes being ‘winded off’. This data then determines the premium level.
Here are a couple of examples of parametric insurance in action.
High-rise residential scheme, Australia
JLT is discussing parametric insurance with a contractor bidding for a Sydney high-rise residential scheme. The project uses prefabrication, such as bathroom pods, to accelerate construction. However, this means more cranage is required, which leads to increased wind risk. We have proposed a parametric solution to insure against the cost of spending longer onsite, and for liquidated damages from project delays.
Motorway project, Auckland
The wet weather in New Zealand allows only a six-month window for earthworks. Rainfall that reduces a contractor’s productivity in that period would have a significant financial impact.
To transfer this impact, we proposed a parametric product to a contractor bidding for a motorway project north of Auckland.
We worked with a specialist parametric insurer to quantify the exposure, which included the idle-standing costs of staff and hired plant, acceleration costs and liquidated damages.
The price of the cover was set according to the size of the ‘trigger event’; so for 2 millimetres of rainfall in one day, the premium would be higher than for 4 millimetres.
In addition, the options presented regarding limits and retentions allowed the client to pick a comfortable premium.
For further information, please contact Edel Ryan, Partner on +44 20 7528 4745