Construction sector: Defend against the weather gods!
The recent heavy rain in Sydney served as a timely reminder that the risks associated with weather are ever-present. With the Bureau of Meteorology (BOM) revealing Sydney had its wettest March since 1975 and the most rain days since 19901, weather continues to play a critical role in construction projects.
In 2016, rainfall was above average for most of Australia, with the nationally-averaged rainfall 17% higher than normal.2 However, it’s not just rainfall that is a key weather pressure for construction. BOM has also suggested Australia is likely to experience significant warming in the next century. Projections for warming by 2100 range from approximately 2.5 °F to over 6 °F (depending on global greenhouse gas emissions throughout the 21st century)3.
To avoid unforeseen delays in your build programme, Alister Burley, Aon’s Construction Practice Group Leader, provides some tips on how to hedge weather risk.
For construction companies, weather-based pressures are extensive and need careful consideration as they could adversely impact upon company reputation and financial performance. Key weather concerns for the construction sector include:
- Unseasonable weather – for example extreme heat meaning roads have to be re-laid
- Major weather event damaging property ie cyclone, fire, flood or landslide
- Exposure to unbudgeted project costs as workforces are delayed through inability to work in extreme heat or rain
Hedge your weather risk
With the variety of weather-related risks for the sector considered, how can construction companies manage extreme weather events? According to Burley, there are a number of ways to hedge weather risk, which can be implemented on a per project or portfolio basis. The most common means is through Derivatives.
Derivatives
Weather derivatives are financial instruments that can be used by organisations or individuals as part of a risk management strategy to reduce the risk associated with adverse or unexpected weather conditions. Weather derivatives are bespoke solutions for organisations covering a specific weather event (rain, temperature and wind). A clear advantage of a weather derivative is access to immediate funds post the occurrence of a defined event (as they are considered “parametric” based and do not required proof of indemnity). The actual events are determined using BOM weather gauges, and most weather derivative risk takers have a Standard and Poors minimum rating of “A”.
This option also provides the ability to transfer risk on a specific contract-needs basis and can provide the ability to cap weather exposure. In some instances it can provide a contract pricing advantage and can help in ensuring cash flow protection through claims being immediately settled.
Aon can help – protection against extreme weather events
Aon, in partnership with expert weather analysts, CelsiusPro, specialise in transferring weather risk from our construction clients’ balance sheets. Our construction clients receive access to Aon and CelsiusPro’s exclusive modelling capabilities, whereby we correlate weather patterns to our clients’ specific projects. With access to immediate climate data, insurance structuring and policy settlement, we can create bespoke weather solutions specific to our construction clients’ requirements.
For more information on construction weather risk and protection options, get in touch with Alister Burley.
1 Bureau of Meteorology - http://www.bom.gov.au/climate/current/month/nsw/sydney.shtml
2 Bureau of Meteorology - http://www.bom.gov.au/climate/current/annual/aus/2016/
3 Bureau of Meteorology - http://www.bom.gov.au/state-of-the-climate/