Parametric Insurance: Protect your Business from Elevated Hurricane Risk

McGowan - Protect your Business from Elevated Hurricane Risk with Parametric Insurance

Hurricane season runs from June 1st to November 30th each year, bringing dread to coastal communities. Businesses in “hurricane alley” may take months or even years to fully recover from property damage incurred from even modest storms. Weather data from recent years shows a trend toward highly active hurricane seasons. Forecasters predict that 2022 will follow this trend with an “above-normal” number of storms with as many as 21 storms, 10 of which may elevate from tropical storms to hurricanes.

Businesses in storm zones must be proactive in protecting their businesses. Understanding the risks and preparing accordingly is the best way to protect yourself and your business. Additionally, seeking out proper insurance coverage is also vital. But traditional insurance often does not cover hurricane damage, or if it does, it’s not adequate to fully cover potential storm damage.

Fortunately, parametric insurance is available for disaster-type situations, including hurricanes. Parametric insurance does not function in the same manner as indemnity insurance. It has unique pros and cons, which business owners need to understand before investing in a parametric policy.

This post will identify steps that business owners can take to help prepare for the worst-case hurricane scenario.

Predictions for the 2022 season

Meteorologists predict that 2022 will be an “above-normal” season for hurricanes and tropical storms, with an estimated 14 to 21 storms. Wind speed marks the difference between tropical storms and hurricanes. To become a “named” storm, it must reach wind speeds of 39 mph or higher. When a tropical storm reaches wind speeds of 74 mph and above, it officially becomes a hurricane.

This season, six to ten of the anticipated storms are expected to become full-blown hurricanes. Of those, three to six will grow to Category 3 or higher, which means that winds can exceed speeds greater than 111 mph. Contributing factors to the active 2022 season include lighter trade winds, cooler ocean temperatures, and an especially active West African monsoon season.

Leading weather experts can make these predictions with roughly 70% accuracy. However, the number of storms expected in a season does not predict how many of those storms make landfall.

Read more: Wind Buyback Insurance: Everything You Need to Know

Hurricane season preparedness for your business

The appropriate time to prepare for a hurricane is now. Businesses must evaluate their disaster plans as early in the hurricane season as possible, but it’s never too late to re-evaluate hurricane preparedness measures.

1. Create an emergency checklist
Panic is nearly as much a threat to a business in the lead-up to a hurricane as storm surges and wind damage. Create a storm preparation checklist and ensure it is widely available to staff.

2. Create an evacuation plan
Is your business located in an evacuation zone? Chart several routes for staff to evacuate in case roads flood or are otherwise blocked. Encourage staff to make arrangements for their pets and elderly family members.

3. Create “go kits” for staff
Put together emergency kits for team members that may end up stranded on business property. Also, encourage staff to create similar kits for their homes or vehicles. A basic kit includes:

  • First-aid supplies
  • Non-perishable food
  • Batteries
  • Loud whistle
  • Maps
  • Flashlight
  • All insurance documentation
  • Contact list that includes business owners’ information and emergency services

4. Secure and strengthen business property
Protect against hurricane wind damage by boarding up windows. Use plastic sheeting and duct tape to secure doors and other areas at risk of flooding. Further steps might include securing generators or batteries for power backup and stocking extra food and water for any staff that might get stranded.

5. Backup data
Data security is easily overlooked in a rush to evacuate in the event of a hurricane. Ensure all onsite computers are backed up to secure locations, preferably on the cloud.

6. Take the threat seriously
Perhaps the most important of all these steps is to take the threat of hurricanes seriously. If an evacuation order is issued, businesses must be prepared to honor it and proceed with due diligence. Ignoring the peril of hurricanes could lead to elevated property damage or, worst-case scenario, the loss of life. Do not put your business at risk by failing to appreciate the danger.

Read more: Preventing and Preparing for Apartment and Condo Hailstorms

What is parametric disaster insurance?

The final step in hurricane disaster readiness is evaluating business insurance coverage. Unfortunately, many typical property policies are simply inadequate. Parametric insurance is an innovative solution.

Unlike traditional insurance policies, parametric insurance does not reimburse policy holders for damages incurred. Instead, these policies (also known as index-based insurance) use a “trigger” that activates payouts. For example, in the case of hurricanes, the trigger is identified as winds reaching a certain speed or storm surges reaching a certain height.

The benefits of parametric policies include faster payouts than indemnity policies, coverage of high-risk areas, and maximum flexibility. Businesses damaged by hurricanes usually must wait months while adjusters confirm damages and values. Instead, parametric insurance pays out within days of its trigger metric or metrics being met. The metrics are confirmed by an independent third party, not the adjusters themselves. Businesses located in high-risk areas, such as flood zones, may be able to seek parametric coverage instead of or in addition to indemnity policies that might otherwise be too costly.

Flexibility is also a key benefit of parametric insurance. Hurricane coverage can be structured to pay out a percentage of the policy value based on if specific triggers are met. For example, 100% of the coverage might pay out if wind speeds reach 111 mph versus a 75% payout for wind speeds of 74 mph and so on.

McGowan Risk Specialists help clients make informed decisions tailored to their insurance needs. Learn more about parametric coverage here.