Parametric Insurance: A Complement to Traditional Property Coverage

September 1, 2023 6 mins

Parametric Insurance: A Complement to Traditional Property Coverage

Many risk buyers remain challenged to find adequate coverage to address a growing protection gap, especially for their cat-prone exposures and other risks. Parametric is an alternative solution that has grown in utilization to insure against a variety of perils in any market conditions.

Key Takeaways

Natural catastrophes remain a major concern among primary insurers and reinsurers, creating a challenging market situation for buyers.
Parametric insurance is a unique alternative risk solution that can complement traditional indemnity coverage.
Parametric provides a different way to think about mitigating risk, especially when conventional products are restrictive.

Underwriter concerns over natural catastrophe losses continue to drive a hard global property market. Many risk buyers remain challenged to find adequate coverage to address a growing protection gap, especially for their cat-prone exposures and other risks, including non-damage business interruption, loss of attraction, loss of ingress/egress, and sub-limited or excluded coverage.

And for good reason. According to Aon, the market continues to worsen, with expectations for market challenges to extend through at least Q3 2023:

Global insured losses in the first six months of 2023 were anticipated to reach $53 billion — the fourth highest on record. Natural catastrophes in the U.S. contributed $40 billion to that figure.
Property rates increased in North America from an average of 13.9 percent in Q1 2023 to 25.5 percent in Q2 2023.
Capacity for cat-prone regions, including Florida (windstorm) and California (earthquake), continues to decrease.

As a result, risk buyers have been extra creative with their risk management programs through the use of increased retention and alternative risk solutions. This is where parametric insurance comes into play — an alternative solution that has grown in utilization to insure against a variety of perils in any market conditions.

The Benefits Driving the Rise in Parametric Insurance

Parametric insurance has emerged as a compelling and unique solution, especially in cat-prone areas where market capacity is restricted and rates are climbing. This is occurring for a variety of reasons:

Independent: Coverage is triggered when predefined parameter thresholds measured and reported by a third party are met. This includes proximity and intensity of a storm, according to the National Oceanic and Atmospheric Administration. Through parametric, risk managers can clearly define events that will, and will not, pay claims, as well as the sum of those claims.
Fast: Claim settlement is quicker and more transparent than traditional insurance solutions since the triggering event occurrence is binary. Coverage is usually confirmed within days, and funds arrive within weeks — and without dispute.
Flexible: Any covered economic loss ensuing from a triggering event is an indemnifiable expense under parametric insurance. This broad coverage helps address the protection gap in traditional policies. Uninsurable exposures become insurable with a parametric trigger.

“Parametric products, under any market condition, enable clients to access coverage in different ways,” says Michael Gruetzmacher, head of Aon Alternative Risk Transfer and Innovation. “It creates an avenue for additional capacity for issues that are not covered by traditional property insurers and another source for clients to address volatility.”

$53B

Global insured losses in the first six months of 2023 were anticipated to reach $53 billion — the fourth highest on record.

Parametric products, under any market condition, enable clients to access coverage in different ways.

Michael Gruetzmacher

Head of Alternative Risk Transfer and Innovation, North America

Case Studies

Parametric Insurance: An Alternative Business Interruption Solution

Situation: A technology firm with a unique exposure was unable to obtain business interruption from the traditional property insurance market. Operations were highly concentrated and exposed to tornado risk.

Solution: The broker worked closely with the client to provide parametric insurance tornado coverage, which would have been unobtainable for the client with traditional markets.

Outcome: The client achieved an alternative source of capacity and risk transfer that was not considered by the traditional market.

Eliminating the Protection Gap with Parametric Insurance

Situation: A coastal municipality was uncomfortable with its traditional property policy sub-limits, which had significantly limited recovery following a recent hurricane.

Solution: The broker designed a parametric hurricane policy to top-up the debris removal sub-limits, while also providing funds to address beach erosion issues that were not remedied by the U.S. Federal Emergency Management Agency.

Outcome: The client achieved a decreased risk burden on an already-thin budget. The parametric solution also decreased the taxpayer burden and provided a more efficient use of capital.

Controlling Future Risks

Parametric insurance provides a different way to think about mitigating risk, especially if conventional products are restricted, unavailable or not meeting an organization's needs. It serves as a strategic tool for companies to partner with insurers to help solve complex business challenges — and ultimately provide organizations with more transparency and better control.

“This is all about addressing the protection gap in a hard market,” says Peter Lacovara, managing director in Aon’s Alternative Risk Transfer and Innovation practice. “The hard market is not just about price, but terms and conditions, too. And parametric, for all intents and purposes, does not have terms and conditions, deductibles, exclusions or sub-limits — and that’s where it shines. All those things that get tightened up when carriers get more sensitive to how they deploy capital make parametric more effective in a hard market.”

Aon's Thought Leaders

Michael Gruetzmacher
Head of Alternative Risk Transfer and Innovation
Aon Commercial Risk Solutions, North America

Peter Lacovara
Managing Director, Alternative Risk Transfer and Innovation
Aon Commercial Risk Solutions, North America

Colin Harper
Managing Director, Alternative Risk Transfer and Innovation
Aon Commercial Risk Solutions, North America

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