It Pays to Be Proactive. How Paul Boatman’s Replica Coverage Strategy Ensured Construction Project Success
Prometheus Real Estate Group’s construction projects often involved multiple buildings or phases.
With each building or phase starting at different times, that added to the complexity of finding coverage for the company, which specializes in high-end multiple family properties.
For strategic purposes, cover was placed per project rather than by building or phase.
When a project incurred significant damage, the part of the building that was yet to be constructed would most likely be subject to increased construction and inflation costs.
The problem was that in the event of a large loss, those associated increased expenses weren’t covered under a traditional builder’s risk policy because, in effect, there had been no physical damage to the unbuilt property.
This could prove expensive with the uncovered risk’s cost around $5 million to $15 million per project.
Enter Paul Boatman, vice president of risk management at Prometheus. To address the problem, Boatman approached a reinsurer and his broker to develop replica coverage.
This involved providing them with detailed project information including construction design, scheduling, safety and loss history and control measures. Using that, they created a model that applied a monthly inflation factor per project for the unbuilt portion.
Boatman also had to gain the trust of the reinsurance company and get it comfortable with the risk.
He did this by working closely with his point of contact, holding several face-to-face meetings and phone calls.
“I was extremely proactive in assessing the initial risk involved in these projects,” said Boatman.
“The main concern was that if there was a major loss we wouldn’t be covered under a traditional builder’s risk policy because of all these additional expenses such as rising construction costs and inflation.”
As a result, over a four-year period, they developed a hybrid indemnity/parametric solution with the reinsurer, Swiss Re, that, in the event of a significant event where at least 20% of the property’s value was lost due to physical damage, would pay up to a pre-agreed amount to offset the inflationary cost of the unbuilt part of the project, according to a pre-defined schedule.
The amount reflected the coverage need at the various stages of the project.
To gain an economy of scale, the solution, which was presented to and approved by Prometheus’ president, CEO and CFO, was implemented for a pipeline of eight projects.
According to Swiss Re, this was the first solution of its kind that it had developed for the construction industry in collaboration with its insured and broker.
“Paul worked directly with the market to try and create a ‘ghost inflation’ product which effectively allowed us to bridge the exposure if there was a major loss,” said Dan Emerson, Prometheus’ senior vice president of construction.
“He effectively orchestrated, built and developed that product, which we put in place across the eight properties we were building at the time.” &
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