The construction industry faces an array of evolving risks, ranging from inflation and financing costs to geopolitical instability and supply chain disruptions. Among these challenges, weather-related issues loom large, often causing delays and cost overruns. Climate change exacerbates these risks, with extreme weather events becoming more frequent and severe.
Descartes recognizes the critical need for solutions to address weather-related delays and the broader impact of climate change on construction projects. Parametric insurance emerges as a proactive approach, offering coverage triggered not only by physical damage stemming from a natural catastrophe event such as a cyclone, hailstorm, tornado, or earthquake, but also by adverse weather conditions that affect project timelines. This innovative insurance model provides essential support to contractors, lenders, developers, and project owners.
Weather risks in construction encompass both climatic and meteorological hazards.
Construction sites, being exposed to the elements because of the outdoor, work-intensive nature of the business, are particularly vulnerable to adverse weather conditions and storms, leading to delays and disruptions in project schedules.
Extreme heat conditions, in particular, have emerged as a pressing concern for the construction industry. The intensification of heatwaves poses substantial risks, exacerbating delays and escalating costs. For instance, in Phoenix, Arizona last year, temperatures reached above 110° F (43° C) for 31 consecutive days.
As temperatures rise, laborers' ability to work efficiently diminishes, and critical processes such as cement hardening become compromised. Studies indicate that productivity declines significantly as temperatures rise and the economic ramifications are high, with the loss of labor due to heat exposure estimated to have cost the economy $100 billion in 2020, a figure projected to skyrocket to $500 billion annually by 2050.
Severe convective storm risks are rising as well, exemplified by insured losses amounting to $50 billion last year in the United States underscoring the urgent need for robust risk mitigation strategies and innovative insurance solutions to safeguard construction projects against the vagaries of weather.
The insurance market has responded to these escalating risks by tightening coverage and adjusting terms and conditions.
According to Marsh’s Global Construction Market Update, in the past five years, the construction insurance market has faced two significant challenges: a decrease in available insurance coverage and an increase in project costs due to inflation. These factors have led to a substantial reduction in the adequacy of insurance capacity compared to when the global market began to tighten. Specifically, there has been up to a 42% decrease in the availability of construction insurance worldwide, which has affected pricing and the terms and conditions of insurance policies.
Insurers specializing in construction and engineering risks have taken steps to address underwriting challenges, leading to improved underwriting results in recent years.
In this landscape, Descartes stands out by offering parametric insurance tailored to the unique needs of the construction industry.
Descartes is capable of insuring against non-damage adverse weather, whereby extreme temperatures, or excess wind or rain, lead to operational interruption, construction project delays, and subsequent penalty and financing costs. Parametric insurance excels in providing non-damage business interruption (NDBI) covers, filling a crucial gap in the market.
By leveraging advanced climate models and expertise in risk assessment, Descartes can accurately quantify and mitigate the financial impact of weather-related risks, even in highly exposed regions where traditional insurers may hesitate to operate.
The flexibility of Descartes' parametric insurance allows for seamless adjustments to changing project valuations and evolving risk profiles. This agility ensures that construction projects are adequately covered at every stage, minimizing the potential for underinsurance and associated financial risks.
The Flexibility of Parametric: Parametric Insurance Cover As A Policy Extension
In a recent construction project, unforeseen weather-related setbacks threatened to derail progress, surpassing the original policy duration provided by the conventional insurance carrier. Compounded by factors like inflation, the carrier didn’t opt to extend the existing policy.
Such predicaments due to weather delay, unfortunately, are all too common in the construction industry, leaving firms exposed to underinsurance precisely when the project's value is at its peak, near completion. Recognizing the urgency of the situation, Descartes stepped in with a tailored parametric insurance solution to bridge the coverage gap during such critical policy extension periods. By seamlessly complementing the existing insurance arrangements, Descartes provides the construction company with the necessary protection against weather-induced delays and associated financial risks.
Our Solution in Action: Parametric Addresses Project Delays Due to Heavy Precipitation
During a previous project, a contractor experienced excessive rainfall that resulted in extended project timelines beyond their contractual limits. Recognizing the heightened risk exposure to excess precipitation, the client and their broker opted for a parametric policy to cover future weather-related disruptions, the sole available option in the market being provided by parametric insurance.
Customizing their policy for their future construction projects, the client established a defined risk period and set an appropriate deductible for adverse weather days. In the event of heavy rainfall, compensation would be calculated based on both the total rainy days and severity, facilitating prompt reimbursement to alleviate the substantial additional project expenses incurred from weather-related disruptions.
