As the saying goes, necessity is the mother of innovation, and when the real estate insurance market got even more competitive this year, owners began searching for alternatives to property insurance. Parametric insurance is one of those solutions.
Parametric insurance can help real estate owners and operations reduce risk and minimize policy costs, by offering property owners a prespecified payout based solely on the magnitude of a local weather or seismic event, as opposed to covering the damage the event causes.
Parametric insurance isn’t for every property. It’s an insurance program designed to fill gaps that exist within the traditional insurance system. Nor is it designed to stand alone. But it can protect outdoor cannabis cultivators from weather risks that are truly beyond their control.
In the current hard property market — in which rates are rising, underwriting criteria is stricter and insurers are writing fewer policies — parametric insurance is a great option for specific property owners.
How a Parametric Policy is Tailored to Specific Perils
A parametric policy pays out in full when the named peril reaches an agreed-upon threshold based on metrics from a carrier-approved national weather organization. The payout is distributed in full regardless of the actual damage that occurred; it does not require claim filings or for insurance adjusters to review the site.
Parametric policies are tailored for a specific peril property owners face. In the Midwest, this could be a tornado measuring F3 or greater; in the Southeast, it could be a hurricane reaching a category or wind speed. While parametric policies are paid no matter what damage a property sustains, the policies are written with strict geographic parameters, so it’s rare for a natural disaster to occur without the underwritten property going unscathed.
Since parametric insurance is customized to each real estate portfolio’s specific risks, it allows building owners and operators to set the terms and conditions for payout. As a result, real estate investors with several holdings in a single area can potentially pool risk to purchase a single parametric policy. For example, if a hotel chain has multiple properties within a one- or two-mile radius, a single parametric policy could cover all the properties.
Benefits of Parametric Insurance Coverage
Although the cost is higher than traditional property coverage, a parametric policy offers a number of benefits including:
- Since a parametric policy meets the unique risk profile of the facility or real estate portfolio it results in a credit to the primary property policy; the parametric policy already covers the risk of property damage from a given peril like storms.
- Because there is no claims adjustment, an expedited payout allows real estate owners and operators to meet the obligations of their loss immediately and they can continue operations or reopen quickly. The speed at which payment is made can have a significant impact on disaster victims. Firms insuring against business interruption risk and agencies providing assistance benefit as resources can be deployed more rapidly at post-disaster.
- Property owners and operators can use a payout to cover business interruption costs. For instance, say a hurricane results in a parametric payout even though the storm leaves a rental property covered by the policy operational. The owner can use the payout to cover forgone revenues as customers cancel reservations.
- Since the amount of payment is unaffected by the total loss, the insured still has an incentive to minimize their losses. This reduces the insurance company’s exposure to the problem of moral hazard.
- The risk of insurance fraud is also reduced for larger contracts, because payment is standardized and the event is large scale and independently verified.
- Parametric insurance may reduce transaction costs involved in writing and administering insurance policies because there is less need for actual loss assessment for payment of claims or underwriting rating requirements to determine the premium based on liabilities and extent of risk sharing.
Numerous factors determine the cost of parametric insurance coverage, including location, risk exposure, desired limits and trigger parameters. Because parametric policies are highly customized, real estate owners and operators will want to work with their broker to help set optimal parameters for coverage.
Kimberly Gore is the Chief Marketing Officer of Hub International’s Hospitality Specialty Practice. The majority of her time is spent with hospitality and tourism clients. Kim is responsible for a strategic approach to carrier relationships, specialization and best in class service to benefit each client. Kim is an active member of the insurance community serving as president of IIABHGC and as a board member for IIABSC and was awarded the South Carolina Young Agent of the year in 2010.