Parametric insurance is an alternative coverage solution which, in certain circumstances, can help real estate owners and operations reduce risk and minimize policy costs. Parametric insurance coverage offers 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.
In the current “hard” property/casualty market — in which rates are rising, underwriting criteria is stricter and insurers are writing fewer policies — parametric insurance may be an option for property owners and operators that need alternative means of coverage.
Tailored to specific perils
A parametric policy pays out in full when the named peril reaches an agreed-upon threshold based on metrics from the U.S. Geological Services. 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.
For example, if a Los Angeles hotel took out a $100,000 parametric policy, pursuant to an earthquake of 5.0 or greater magnitude on the Richter scale, the hotel would receive the full $100,000 if the catastrophic event occurs, regardless of the amount of damage to the hotel.
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.
How do real estate owners and operators benefit from parametric insurance coverage?
Parametric insurance offers several benefits for real estate owners and operators:
- A parametric policy meets the unique risk profile of the facility or real estate portfolio. As a result, a parametric policy results in a significant 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, payout is expedited, allowing real estate owners and operators to meet the obligations of their loss immediately. They can continue operations or reopen quickly.
- 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.
For these reasons and more, parametric policies are gaining traction across industries, from auto dealerships to farms and agribusinesses, as new innovative options surface in response to the hard market.
Building out the right parametric insurance program
Parametric insurance is customized to each real estate portfolio’s specific risks, which 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.
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.
Contact your HUB Real Estate expert for more information on building out a parametric program for your real estate portfolio.