Parametric: A Complement to Traditional Property Coverage

Parametric: A Complement to Traditional Property Coverage
May 1, 2025 5 mins

Parametric: A Complement to Traditional Property Coverage

Parametric: A Complement to Traditional Property Coverage

As property underwriters become increasingly concerned and cautious with catastrophe-prone risks, buyers are turning to alternative property solutions, including parametric, to fill protection gaps in their programs.

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

Despite a moderating property market for well-performing risks, increasing natural catastrophe losses continue to paint a challenging picture in 2025 as underwriters become more cautious where climate-related exposures exist.  

In 2024, Aon data found that insured natural catastrophe losses exceeded $100 billion for a fifth consecutive year, creating a growing challenge for insurers, reinsurers and businesses in volatile areas. Insured nat-cat losses in Q1 2025 of $53 billion were the second-highest quarterly total on record after Q1 2011, with California wildfires contributing approximately 71 percent ($37.5 billion) of that figure.

As a result, risk buyers are filling protection gaps in their risk management programs through increased retention and alternative risk solutions, like parametric. Parametric is an alternative solution that has grown in utilization to insure against a variety of perils, including non-damage business interruption, loss of attraction, loss of ingress/egress, and sub-limited or excluded coverage.

The Benefits Driving the Rise in Parametric 

Parametric is a compelling and unique solution, especially in cat-prone areas where market capacity and terms are restricted, and rates are climbing. There are a few key factors driving this momentum:

  • 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’s Alternative Risk Transfer in North America. “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.”

Case Studies

  • Parametric: 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 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

    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.

Quote icon

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

Controlling Future Risks 

Parametric 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,” says Peter Lacovara, managing director in Aon’s Alternative Risk Transfer practice. “The market for nat-cat exposures 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.”

Aon’s Thought Leaders
  • Michael Gruetzmacher
    Head of Alternative Risk Transfer and Innovation, North America
  • Peter Lacovara
    Managing Director, Alternative Risk Transfer and Innovation, North America
  • Colin Harper
    Managing Director for Alternative Risk Transfer and Innovation, North America

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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