In any insurance, the risk is transferred from the insured to the insurer. For undertaking this risk, the insurer charges an amount which is called the premium. This amount is paid periodically by the insured to his insurer.
Factors deciding the premium rates:
In the constructions all risk insurance policy, the insurers consider the peculiarities of each individual project while determining the premium amount. The basis of calculating the premium depends on the nature of the project and the period of the contract.
The factors contributing the premium calculation are:
- Project cost
- Sum insured
- Project nature
- Project period
- Geographic location
- Period of testing
Sum insured plays a major role in calculating the premium amount. The sum insured should denote the complete value of the contract work including the value of the material supplied, cost of cleaning debris, expected escalation of the contract etc.
Project period also plays a major role and it starts from the time of unloading the first batch of material on the site and ends when the project is fully completed.
Risk assessment is an important activity carried out by the insurers while determining the premium. Submitting an appropriate and accurate information to the insurers will lead to a fairer amount of the premium.
Following factors are considered for risk assessment:
- Exposure of the construction site to various conditions
- Contractor’s experience
- Techniques used in construction
- Building materials used
- Building design
- Construction time schedule
- Consideration of safety factors
For deciding the premium rates, the insurers carefully scrutinize:
- Building contract
- Drawings specification
- Construction time schedule
- Other relevant information
Deductibles and premium:
Choosing a construction all risk insurance plan with high deductible, will lower the monthly premium payments and similarly, having a plan with low deductible will increase the monthly premium amount.
When the period of insurance exceeds twelve months, the premium is collected in installments. The calculation of these installments is as follows:
- A proper interval is maintained between the collection of successive installments. (3months)
- The first installment is based on a percentage of the total premium amount. (5% of premium)
- The entire premium is collected months before the expiry date of the policy. (6 months at least)
Following chart gives the premium rates for different types of construction projects: (Source: Insurance Information Bureau of India)
|Sr no||Construction Type||Risk||Premium rates upto first 3 months||Additional rate per month beyond 3 months|
|1||Residential & Commercial Buildings||Different types of RCC construction and varying number of storeys||1% – 4%||0.02% – 0.05%|
|2||Theaters, Auditorium and Cinema Halls||Height not exceeding 22 m and span not exceeding 10 m||2%||0.02%|
|Height exceeding 22 m and span exceeding 10 m||2.5%||0.03%|
|3||Factory sheds, Warehouses, Cold storages, Hangars||RCC Construction||2%||0.02%|
|Other than RCC construction||2.25||0.02%|
|4||Roads||Based on area type||2% – 3%||0.025% – 0.04%|
|5||Flyovers on land||Based on area spanned||2.5% – 3%||0.03% – 0.04%|
T.S constructions in Mumbai had bagged a big construction project. The project included construction of a residential complex. Since it was a huge project, the company thought of insuring the construction site with the help of the constructions all risk insurance policy.
The insurance company asked the T.S construction to supply the required information. The company submitted the estimate of the total construction work, the period of construction, drawing specifications and the building contract along with other relevant documents.
The construction project was an RCC framed structure of 35 storeys. Since the premium rate was based on the type of the construction and the number of storeys, the insurance company applied a rate of 3.5% premium for the first three months. While calculation the premium, all the risk factors were considered by the insurers and the rate was determined accordingly. Thus, T.S constructions took the constructions all risk insurance policy and protected the site against any material damage or third-party liability.