Methods of construction weather risk assessment
In a presentation on weather risk management for the construction industry and built environment entitled “Protecting a Project’s Balance Sheet with Parametric Weather Insurance Solutions,” presenters Paul Ramiz, Ralph Renner and Michael DeLio introduce the role of parametric weather insurance for construction projects. Further, the presenters review methods of construction weather risk assessment with a case study.
Schedule delays and cost overruns, construction defects and warranty claims
Weather is an age-old problem. Adverse weather impacts construction projects in numerous ways. Labor and material shortages lead to schedule delays and cost overruns. Failed new products or techniques lead to construction defects and warranty claims. And, both normal bad weather, such as thunderstorms, and frequent severe weather, such as hurricanes, cause work slowdowns and site shutdowns.
88% of companies’ profitability is directly impacted by weather!
Across all global industries and market sectors, including the construction industry, increasingly hazardous weather presents heightened risk exposure. The presenters highlight how “88% of companies’ profitability is directly impacted by weather.” Accordingly, insurance carriers offer parametric weather insurance products to help contractors against losses from both more frequent and more severe adverse weather.
Protect a project’s balance sheet from adverse weather
Parametric weather insurance products help general contractors and construction managers protect a project’s balance sheet from adverse weather such as rainfall, freeze, heat, wave height, wind speed, irradiation hours or peak sun hours, and numerous other weather phenomena that can impact site crews, heavy equipment, construction materials, building products, and work results, for example.
Some of the many benefits to a project’s balance sheet include: protecting your construction project from the impacts of adverse weather; “smoothing” your profit and loss by eliminating the risks of bad weather; and, maintaining project pricing through clear definitions of weather risk. Further, insurance carriers collaborate together with contractors to tailor language specific to your construction projects and revenue history.
One of the many key benefits of parametric weather insurance for construction projects – insurance policies pay out automatically when adverse weather and weather events occur, without the need for adjustment, negotiation or settlement as with other types of insurance policies. Further, weather insurance coverage can be combined together with traditional insurance coverage to “bridge the gap” in construction project exposures.
How does weather insurance for construction projects work?
First, historical weather data is overlaid on schedule activities and critical paths to assess how adverse weather can impact work results. Second, project-specific language is crafted to manage the impacts of specific perils on the project’s balance sheet. And third, weather data is queried either during or after the policy period to determine pre-defined payment amounts — proof of loss is data-driven.
The presenters advocate two approaches for accessing weather data: first is the weather station approach, and second is the gridded climate data approach. With the weather station approach, weather station data is automatically recorded and electronically collected from weather stations, such as airport or NOAA stations. Potential basis risk increases based on the distance between the station and the site.
With the gridded climate data approach, historical climate data is modeled for the geographic area of the site based on historical weather data from past years. The gridded climate data approach helps address some of the challenges with the potential basis risk in the weather station approach, if the site is not nearby airport or NOAA stations — but historical weather data is not always an indicator of future phenomena.
“Overlaying project data with independent third-party weather data (such as WeatherBuild), correlations to risks can be identified that previously were unquantified. Developing an appropriate index for the (construction) project and (for the weather) risk allows for a meaningful (weather) risk transfer structure…” for general contractors (GCs) and construction managers (CMs) delivering projects sensitive to adverse weather.
Benefits of leveraging parametric coverage on construction projects
In summary, the presenters highlight the following benefits of leveraging parametric coverage on construction projects: “clear and defined loss trigger based on third-party independent data; easy payment calculation; worldwide geographical product access; large capacity due to traditional and alternative market availability; transparency to interested parties throughout the process; and, broad coverage with limited exclusions.”
Headquartered in Cambridge, MA between Harvard and MIT, WeatherBuild® offers a suite of decision support solutions that empower contractors, owners and operators to improve situational awareness and make better-informed decisions about weather events, schedule impacts, safety risks and probable outcomes.
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