Riley Winchester and Blake Martinez discuss with us, "Parametric Insurance: An Effective Management Solution for Construction Companies."
In the construction industry, risk management plays a vital role in ensuring success and profitability of projects. With uncertainties such as weather, natural disasters, and supply chain disruptions, construction companies often face significant financial risks. One innovative solution that has gained traction in recent years is parametric insurance.
Parametric insurance is a type of coverage that pays out a predetermined amount based on specific parameters, rather than indemnifying actual losses. Unlike traditional insurance, which requires lengthy claims processes and investigations, parametric insurance simplifies the claims settlement process by establishing clear triggers and payouts. In fact, approximately 90% parametric claims are fully paid and settled within 3 weeks.
Benefits for Construction Companies:
Efficient Claims Process: Parametric insurance offers a streamlines claims process that eliminates the need for lengthy assessments and negotiations. When a predefined trigger is met, such a wind speed exceeding a certain threshold during a storm, the payout is automatically triggered. This swift claims settlement allows construction companies to quickly access funds and resume operations without prolonged delays and profit fade.
Customizable Coverage: Parametric insurance allows construction companies to tailor coverage to their specific needs. Rather than insuring against all potential risks, companies can focus on specific perils that are most relevant to their projects. For example, a company operating in a hurricane-prone region can customize its policy to provide coverage specifically for wind damage.
Budget Certainty: Traditional insurance premiums are often based on historical loss data, leading to fluctuating costs each year. Parametric insurance, on the other hand, utilizes predetermined triggers and payout amounts, allowing construction companies to accurately forecast insurance costs. This budget certainty enables better financial planning, particularly for long-term projects.
Rapid Recovery: In the event of a covered event, such as severe weather, parametric insurance provides an injection of funds quickly. This rapid recovery helps construction companies mitigate potential losses, maintain cash flow, and minimize project delays. By reducing financial setbacks, parametric insurance facilities smoother project execution, and enhances a company's overall resilience.
Considerations and Limitations:
While parametric insurance offers several advantages, it's important to consider its limitations. Since payouts are based on predetermined triggers, coverage may not fully align with actual losses incurred. Additionally, the availability of reliable data to establish triggers and determine appropriate coverage may vary across regions and perils. Therefore, careful assessment and collaboration with a professional insurance advisor is crucial to ensure adequate coverage.
Parametric insurance presents a compelling solution for construction companies seeking effective risk management strategies. By streamlining claims processes, offering customizable coverage, providing budget certainty, and facilitating rapid recovery, parametric insurance enables construction firms to mitigate financial risks effectively. While it is important to consider the limitations, the use of parametric can be a valuable tool in safeguarding construction projects and enhancing the overall profitability of your company.
Blake Martinez, CPCU, AFSB
New Orleans Office
Blake Martinez is a Producer at Ross & Yerger on the construction team. Martinez specializes in commercial insurance, captives, surety bonds, construction, and financial strategy.
Riley Winchester, AAI, CLCS
Riley Winchester is Producer at Ross & Yerger on the construction team. Winchester specializes in oil & gas, construction, offshore, captives, and group benefits.
ABOUT ROSS & YERGER
Ross & Yerger – one of the largest independent, privately-held insurance agencies in the Southeast – was established in 1860 and is headquartered in Jackson, MS. The firm has 127 employees throughout their five offices in Jackson, Tupelo, Hattiesburg, New Orleans, and Memphis. Ross & Yerger is licensed in all 50 states and offers a full range of brokerage services, including insurance, employee benefits, bonds, financial services, and risk management consulting. For more about Ross & Yerger, visit www.rossandyerger.com.