Parametric Hail Insurance: Coverage for Commercial Buildings

parametric insurance

The annual cost of hail damage in the U.S. has surpassed $22 billion a year. Hail inflicts serious damage to homes, cars, crops, and people.  It’s common for storms to produce hail the size of baseballs. At impact, these baseball-sized chunks of ice are moving at anywhere from 80 to 110 mph. When you imagine millions of baseballs raining down from the skies, it’s clear why hailstorms are so costly.

In 2019 there were over 5,000 major hail events. Major hail events are hailstorms with hailstones one inch in diameter or greater. Unfortunately, the frequency of major storms of all kinds have been on the rise each year, hailstorms included. 

Severe weather locations in the U.S.

It’s predicted that the increase in severe storms will continue in 2020. This is not great news considering 2019 was a record year. The National Weather Service issues tens of thousands of warnings each year for severe thunderstorms, flooding, high winds, winter storms, tropical storms, and extremes in temperatures. Because severe thunderstorms produce hail and tornadoes, most severe weather warnings are issued for the south and the central U.S. 

The cost of hail damage to commercial buildings

For most commercial buildings, hail does the most damage to roofs and siding. A 2017 hailstorm in a Denver, Colorado suburb shut down a 1.1 million-square-foot mall for over six months. The hailstorm was the costliest in Colorado history, with over $1.4 billion in insurance claims. 

Unfortunately, there is not much you can do to mitigate hail damage for a commercial building. If the building is in an area known for heavy annual storms, the builders would be wise to avoid skylights. You can design a building around the area’s weather, to some degree. For example, builders can use hail rated roofing systems to minimize the impact of severe storms.

Along with best construction practices, commercial building owners must get a professional inspection following all severe hailstorms. Minor repairs can quickly turn into costly restorations or roof replacements when left unchecked. 

Parametric insurance

Nobody can control or accurately predict the weather. A building owner may not get hit with the worst of severe hailstorms for years, while another may get hit hard every year. Then the next year, the pattern may change. The only thing predictable about severe weather events is their unpredictability. That’s why it’s critical to do everything possible to reduce exposure. 

Parametric hail insurance

Parametric insurance is also known as index insurance. This insurance policy pays a policyholder based on predefined thresholds and characteristics of an event. Windspeed, shake magnitude, and size of hailstones are all examples.

The coverage is based on the event, and not specific damage to an asset. As a result, these products can rapidly disperse the needed capital for recovery. Additionally, because the structure covers the impacts of an event and not just losses, the policy can also include any expense associated with the event, which may otherwise be excluded from a traditional insurance policy.

The flexibility of being able to design the coverage triggers and subject geographies is one of the most significant benefits of parametric insurance. For example, if a commercial business owner had exposures in locations across a state or various states, parametric coverage triggers can be designed for customized coverage within those areas. It can also cover all economic risks that impact an operation.

Current marketplace

The current marketplace is moving towards high deductibles in hail areas, higher than in some Tier 1 CAT areas in certain places. It’s not uncommon to see 3-5% deductibles for hailstorms in certain pockets of the country. The minimum deductible many carriers will offer now is 2%.

A deductible can be decreased with a traditional deductible buydown, but the price will increase as the overlying deductible increases. This can start to put heavy financial pressure on insureds who are unable to afford or want to purchase the full line of exposure for their buildings.

Many insureds choose to forego a wind deductible buydown and are left self-insuring their hail exposure throughout the year. Many will get into disagreements with their carriers come claim time, and claims can be strung out for several months or even years.

The advantage of a hail parametric is two-fold. The claims payment is rapid and without argument. The coverage is the most comprehensive that exists for this peril. Insureds can receive their indemnification quickly and can go about making their repairs. They can even receive indemnification for cosmetic damage, which is impossible to insure in the traditional marketplace.

Another benefit is that the overlying deductible does not affect the pricing of the coverage limit that insureds wish to purchase. They can choose their limit of coverage based on their exposure and, most importantly, their budget. This opens up a variety of alternative overlying structures and adds more carriers into the mix that may not have participated before.

The insured can leave a gap in coverage between the overlying carrier and the parametric limit or can even exceed the overlying deductible with the parametric limit if they have economic concerns not currently covered in the traditional insurance contract.

Customized and comprehensive solutions

At McGowan Risks Specialists, we specialize in parametric hail insurance and are able to offer the product to almost any commercial property exposure. We also are a specialist in wind deductible buydowns and can offer both options for your clients to choose from. We can also offer a combination of the two products as well and provide a customized and comprehensive solution for your insureds. 

Please contact us to see how we can help you design a parametric insurance product for your client.

New call-to-action