Protecting North American Contractors from Extreme Heat Risks with Parametric

Protecting North American Contractors from Extreme Heat Risks with Parametric
March 18, 2024 13 mins

Protecting North American Contractors from Extreme Heat Risks with Parametric

Protecting North American Contractors from Extreme Heat Risks with Parametric

Growing extreme heat conditions have escalated risks, delays and costs for the construction industry in North America. Parametric insurance can help protect against such risks, offering contractors and building owners agility, efficiency and flexibility.

Key Takeaways
  1. Extreme heat presents significant challenges to construction projects, leading to delays, increased costs and concerns about workforce health.
  2. Parametric insurance serves as a valuable tool, offering flexible coverage triggered by independent events, quick claim settlements and strategic access to liquidity.
  3. Advanced data, protecting workers’ health and partnering with qualified brokers are key considerations when exploring parametric insurance as a proactive heat risk management strategy.

Extreme heatwaves, fueled by climate change, represent one of the most pressing challenges for the construction industry in North America. The most devastating impact is on human health and life, with heat-related deaths surpassing those of any other weather-related danger. This is accompanied by significant indirect health issues, such as respiratory failure, cardiovascular disease and heat stroke.

From a business standpoint, extreme heat creates widespread issues, affecting operations, productivity and employee wellbeing. Particularly in the agriculture and construction industries, the impact of heat on labor productivity is significant, resulting in estimated annual losses of $100 billion in the U.S. alone.1

 

 

 

2023 Losses from Natural Disasters in the U.S.
2023 Losses from Natural Disasters in the U.S.

Unlike acute perils, the full impact of chronic perils like extreme heat are often cumulative and difficult to measure, leaving a potential protection gap (see graphic). Further, while traditional insurance markets address physical damage, the economic implications faced by clients, including business interruption and loss of employee income, are often more substantial.

30%

U.S. losses as percentage of global economic losses

Extreme Weather Highlights: North America

  • Phoenix, Arizona saw 31 consecutive days of 110 degrees Fahrenheit or greater temperatures in June-July 2023, breaking the heat record.
  • Prolonged drought conditions in the Southwest led to $14 billion in economic losses and $6.5 billion in insured losses.
  • The majority of outdoor fatalities, between 50 percent and 70 percent, occur in the first few days of working in warm or hot environments, according to OSHA. This is because the body needs to build a tolerance to the heat gradually over time — also known as heat acclimatization. A lack of acclimatization represents a major risk factor with fatal outcomes.
  • Since 2011, the Bureau of Labor Statistics has reported 436 deaths due to workplace heat exposure and 2,700 cases of heat-related illnesses, leading to lost days at work.
  • OSHA has intensified its enforcement of inspections where workers are exposed to heat hazards, especially in high-risk industries like construction and agriculture. 

67%

U.S. losses as percentage of global insured losses

Quote icon

Amid increasing volatility and complexity, there is a significant opportunity for construction and real estate organizations to leverage parametric solutions to become more resilient to the climate and catastrophe risks.

Cole Mayer
Global Head, Parametric

How Parametric Solutions Can Help

Parametric insurance is complementary to traditional insurance solutions. It can be used in situations like extreme heat, where a risk must be mitigated and may not be covered via traditional markets. 

Unlike traditional insurance, parametric coverage is triggered by predefined parameters, providing quicker and more transparent claim settlements. With its flexibility and broad scope, parametric insurance helps bridge the protection gap, making it an ideal alternative risk transfer solution in catastrophe-prone areas — and in areas where extreme heat is an issue.

Parametric takes an “if-then” approach. As more risk managers rethink their risk resilience, this method complements and supplements traditional insurance, paving the way for an innovative and transformative, yet straightforward solution, perfectly suited for catastrophic events. 

Here’s how the core mechanics of parametric insurance work:

1. The “if:” Parametric insurance stands out due to its coverage trigger and pre-agreed payouts. Underwriting is simplified as coverage is activated by the occurrence of an independent event, as determined by neutral third-party data providers.

2. The “then:” With the independent data trigger and pre-agreed amounts, recoveries occur swiftly — often within days or weeks of an event. This quick access to capital is critical for businesses that need immediate financial assistance following an event.

3. Solving the protection gap: Parametric insurance offers broad coverage, ensuring that any economic exposure arising from an event can be insured. Previously uninsurable exposures become insurable, with the parametric trigger acting as the missing link to unlock flexible capital.

Case Study: How Parametric Helped Texas-based Contractor
  • Situation

    Extreme heat is a growing concern in the southwestern U.S. – Texas recorded its second-hottest summer in history in 2023, and above-average temperatures are again forecasted for 2024.[1] A Texas-based general contractor saw many of its 2023 projects idled as a result. While the firm built in certain delays due to expected heat spells that could idle its labor force, it was also concerned about prolonged extreme heat scenarios that would increase delays and costs over its allotted budget. It looked at traditional insurance, but extreme heat exposure is not easily addressed in this market. The business therefore needed a more innovative solution to transfer the risk, especially with another hot summer quickly approaching.

  • Solution

    The contracting firm’s broker recommended a parametric extreme heat cover that provided a payout if the number of days of extreme heat (clearly defined in the policy) exceeds a pre-agreed threshold. The payout would also provide flexibility to address any economic loss the contractor would incur resulting from the event. This would include overtime pay to reduce delays, increased financial support to workers and contract penalties associated with delays.

Parametric Benefits for Construction Stakeholders

For Contractors For Building Owners
Reduces contingencies in contract prices Mitigates income loss from delays to commercial operations dates
Enables worker wellbeing Enables worker wellbeing
Facilitates access to capital — Parametric may cover additional costs to help keep projects on schedule Facilitates access to capital — Parametric may cover additional costs to help keep projects on schedule
Includes possible liquidated damages for delays and associated expenses Ensures debt service is met in case of Cost of Delay (CoD) delay

3 Ways to Take Action

The escalating risks posed by extreme heat in the construction industry demand proactive and innovative risk management strategies. To adapt and thrive through these heat-related challenges, it's crucial for construction companies to act now:

  • 1. Use forward-looking data and analytics.

    This includes weather data and heat tracking tools to understand the projected impacts of extreme heat on the business and its employees. By gaining insights into future risks, including temperature trends, heat indices, humidity levels and other environmental factors, firms can proactively implement preventive measures to safeguard operations and ensure the wellbeing of their workforce.

  • 2. Prioritize workforce health and wellbeing.

    Implement measures to reduce heat-related health risks. Create a heat illness prevention plan that plans ahead to protect workers, and encourages water, rest and shade. 

  • 3. Collaborate with experienced brokers and explore alternative solutions.

    Ensure brokers specialize in mitigating risks in the construction industry and consider alternative solutions like parametric insurance. By partnering with knowledgeable professionals, companies can tailor their risk management strategies to their specific needs, enhancing resilience to extreme heat events.

1 Aon 2024 Climate, Catastrophe Insights Report

70%

Percentage of losses covered by insurance

Aon’s Thought Leaders
  • Cole Mayer
    Global Head, Parametric
  • Tariq Taherbhai
    CCO, Construction and Infrastructure, Global Industry Specialties
  • James Dunn
    CCO, Construction and Infrastructure, U.S.
  • Chris McLean
    Head of Construction and Infrastructure, Canada

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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