Parametric: A Complement to Traditional Property Coverage
As property underwriters become increasingly cautious with catastrophe-prone risks, buyers are turning to alternative property solutions like parametric insurance to fill protection gaps in their programs.
Key Challenges in Property Insurance
Natural catastrophes remain a major concern among primary insurers and reinsurers, creating a challenging market situation for buyers. Insured natural catastrophe losses exceeded $100 billion for a fifth consecutive year in 2024, according to Aon data. The first quarter of 2025 saw $53 billion in insured nat-cat losses, the second-highest quarterly total on record, with California wildfires contributing approximately 71% of that figure.
The Rise of Parametric Insurance
Parametric insurance is an alternative risk solution that complements traditional indemnity coverage by providing a different approach to mitigating risk, particularly when conventional products are restrictive. It has grown in utilization to insure against various perils, including non-damage business interruption, loss of attraction, loss of ingress/egress, and sub-limited or excluded coverage.
Benefits of Parametric Insurance
- Independent: Coverage is triggered when predefined parameter thresholds measured by a third party are met, such as the proximity and intensity of a storm.
- Fast: Claim settlement is quicker and more transparent than traditional insurance solutions, with coverage usually confirmed within days and funds arriving within weeks.
- Flexible: Any covered economic loss ensuing from a triggering event is an indemnifiable expense under parametric insurance, helping to address protection gaps in traditional policies.
Case Studies Demonstrating Parametric Insurance’s Effectiveness
- A technology firm with highly concentrated operations exposed to tornado risk was unable to obtain business interruption coverage from traditional markets. Parametric tornado coverage was provided as an alternative source of capacity and risk transfer.
- A coastal municipality used parametric hurricane insurance to top up debris removal sub-limits in their traditional property policy and address beach erosion issues not covered by FEMA.
Industry Expert Perspectives
“Parametric products enable clients to access coverage in different ways under any market condition,” says Michael Gruetzmacher, head of Aon’s Alternative Risk Transfer in North America. Peter Lacovara, managing director in Aon’s Alternative Risk Transfer practice, notes that parametric insurance “shines” where traditional coverage has limitations due to terms, conditions, deductibles, exclusions, or sub-limits.
Conclusion
Parametric insurance serves as a strategic tool for companies to partner with insurers to solve complex business challenges, providing more transparency and better control. It addresses the protection gap by offering coverage without the constraints of traditional property insurance policies.
