Construction risk managers want to see wider parametric options

Experts believe parametric insurance is a good fit for construction firms but stress the importance of thinking very carefully about triggers and say there is a desire among risk managers to widen covers beyond weather solutions.

Teresa Schorstein, senior structurer of parametric at Swiss Re Corporate Solutions, said parametric solutions, which pay out when an agreed trigger has been met and promise much shorter claims processes, can “keep the lights on” when quick payments are needed and offer broad coverage.

Parametrics can supply rapid liquidity with fast payouts, agreed her colleague Hardeep Khela, senior engineering underwriter at Corporate Solutions, in a new report from Commercial Risk Europe based on this year’s Construction Risk Management Europe event.

He said parametric solutions are suitable for constructions firms and can fill gaps left by traditional cover, such as non-physical damage type losses.

Khela has seen parametric cover work across a range of exposures that impact construction firms, from loss of productivity because of extreme heat, to losses caused by high, prolonged windspeed.

Director of risk and management and insurance consulting firm JPIC Group Neil Timberlake said parametric solutions offer a good alternative for clients. But he added that many insurance buyers want to widen the scope of parametric solutions, and he believes this is eminently possible.

“The focus from the market has tended to be on weather events and actually what our clients are looking for is something a bit wider than that to push the boundaries of risk within projects,” he said .

“The parametric market should be able to seize the opportunity to look at the wider risks that its clients face. Really anything that you can associate with some form of indexation should be capable of being insured on a parametric basis. An example of that would be steel costs rising and insuring that against a steel index. So I think clients are looking for something a little bit wider potentially,” he added.

Construction risk managers have suggested that parametrics could expand to cover supply chain disruption, financial loss and even some of the new building materials that the traditional market has been slow to accept.

“I don’t see why you couldn’t do some of those things if you can make that linear connection between any index and a loss. It doesn’t seem to be to be a very big jump from where we are today with weather events into something completely different to fill in the gaps,” said Timberlake.

Schorstein said there is scope to widen parametric solutions. “For example, our team have looked at insuring footfall numbers among other parameters, which there is plenty of data available for. We need to think about new areas and how we would design these polices if clients come asking for new risk areas and triggers,” she said.

But she stressed that risk managers need to think carefully and work with their insurers and brokers to ensure any parametric trigger is set at the correct level so payment is received if and when needed.

There are certainly concerns among some risk managers about setting the right trigger for parametrics, and many wonder if receiving payments is really as simple as things sound in theory.

“I do understand it can seem complicated. But remember, in the case of weather and nat cat, data is available to all of us. So far I cannot think of any transaction I have been involved in where there has been any dispute. Whereas in traditional insurance there is often room for differences of opinion and negotiation. In parametrics it’s clear as per the data whether a payment is due or not,” reassured Schorstein.

“But it is vital to be thorough about that data and triggers when structuring parametric cover as proxy for damages. Or you could end up buying protection that doesn’t pay out when you need it to.”

And the experts advised risk managers to use parametric solutions as part of a range of options within a risk transfer programme, combined with traditional indemnification and, ideally, a captive.

“When most people ask about parametric, they look at it through a traditional insurance lense. They ask can it replace traditional insurance? Can you build me another layer on top of my traditional programme? Or what can you do with a deductible? It isn’t quite so simple. You have to remember that one pays out on actual damage and the other is determined by a trigger. So it is two different concepts,” said Schorstein.

“But parametric and traditional insurance can be complimentary. Both traditional and parametric do things that the other might not so you need to think carefully about how you combine them. You can align them and make them work together. We also support our captive clients to help bring parametric risks into a captive and secure reinsurance,” she added.

Timberlake was on the same page and said it is vital to set your risk tolerance and strategy before deciding on risk transfer options.

“We talk to clients much more broadly about risk appetite and risk tolerance and how they want to finance their risks in general. I think if you can get to that point where you know what your tolerance and appetite for risk is, you can work out how to combine traditional insurance with a parametric programme or a captive. That can make perfect sense as long as you are doing it with your eyes open and you know how you are trying to finance your risks in general,” he said.

Aurelien Schwachtgen, director of client solutions at Aon Global Risk Consultants in EMEA, said insurance buyers need to take global view of their organisations’ risks before approaching parametric solutions.

“You need to understand where you need to fill a gap or have cash payout very quickly after a loss event. It is important to use parametric to cover something very specific,” he added.

Next year’s Construction Risk Management Europe events will be held at the Leonardo London Tower Bridge Hotel on 23-24 April 2024. Please email Stewart Brown for further details.

We are holding our first Construction Risk Management Conference Asia conference in Singapore on 28 September in Singapore.

If you were unable to attend this year’s Construction Risk Management Europe conference and would like to watch the on-demand recordings of all the sessions, please click here.