Two powerful and converging trends have given rise to a new line of insurance products that have growing appeal to businesses, communities and homeowners.
The increasing frequency and severity of hurricanes, wildfires, flooding and other weather-related catastrophes have exposed the insurance industry to ever-greater uncertainty, resulting in higher premiums, reduced coverage and a shrinking financial safety net for property owners. At the same time, technological advances have enabled innovative new ways of predicting risk, assessing damages and handling claims.
Enter a new type of insurance—so-called parametric products.
“Parametric insurance will never replace traditional insurance—it isn’t meant to. It’s designed to stand alongside traditional insurance and complement it,” Karen Collins, vice president of the American Property Casualty Insurance Association, told a session of NCSL’s Base Camp 2024.
“Parametric insurance will never replace traditional insurance—it isn’t meant to. It’s designed to stand alongside traditional insurance and complement it.”
—Karen Collins, American Property Casualty Insurance Association
Parametric products insure a policyholder against damages from specific events by automatically paying out a set amount based on the extent of the event, as opposed to reimbursement for actual losses incurred. Payouts are triggered when certain thresholds are met or exceeded for, say, wind speed (hurricanes), water depth (floods) or magnitude (earthquakes).
With traditional indemnity-based insurance, assessing actual losses is a complex and time-consuming process, and claims may take months or even years to adjust and be paid. But parametric insurance claims are resolved faster and without dispute, typically within 30 days.
Parametric products have been in use for about 30 years, primarily in the form of catastrophe bonds issued by insurance companies through investment banks, but only recently have they become more widely developed and offered by carriers, Collins says.
“That’s because of new technologies and the greater availability of data at an increasingly granular scale,” she says. “Satellites, drones, remote sensing devices, AI—these are all things being used by insurance companies to model risks, customize coverage and verify the magnitude of weather-related events.”
Rapidly rising interest in parametric products has attracted the attention of state regulators, says Aaron Brandenburg, an assistant director at the National Association of Insurance Commissioners. Some state officials think the products ought to be regulated “but are concerned that they don’t fall under existing insurance law, and so are outside their purview,” he says.
His organization has been studying various aspects of parametric insurance for some time and is publishing a white paper in early 2025 that might include regulatory guidance, Brandenburg says.
One of the main drawbacks of parametric insurance policies is that “they typically don’t cover the full basis risk of the insured. Policies are based on parameters and, therefore, don’t always cover all of the damage that occurs,” he says. “So, there could be a need for some adjustments.”
Brandenburg and Collins provided examples of how communities and individuals are using parametric products in areas where traditional insurance has been difficult, if not impossible, to obtain.
In 2023, a pilot flood-insurance program was launched in New York City to provide automatic payouts of up to $15,000 to qualifying low- and moderate-income households in flood-prone neighborhoods. Earlier this year, a similar program was established in Isleton, Calif., a Gold Rush-era town in the Sacramento River Delta where levees have been breached numerous times over the past 100 years.
In Oregon, Washington and California, a 6-year-old program called Jumpstart Parametric Earthquake Insurance offers payouts of up to $10,000 for homeowners and $20,000 for small businesses affected by quakes. The average monthly premium is as low as $8 for homeowners and $16 for businesses.
“What we’re seeing is a fast-growing market offering solutions that complement other risk-mitigation strategies, and a streamlined process that benefits both customers and insurers,” Collins says. “Parametric products are here to stay.”
Suzanne Weiss is a Denver-based freelance writer.