How Parametric Products Benefit Catastrophe-Driven Risk Transfer


How Parametric Products Benefit Catastrophe-Driven Risk Transfer

Parametric insurance, also known as index insurance, is an innovative product that functions differently than traditional insurance. As agents and insureds continue to look for ways to differentiate their programs and ensure they’ve secured the most efficient way to protect their assets, the parametric landscape has and will continue to play a major role in catastrophe-driven risk transfer.

In its simplest form, a parametric product is one that pays an insured based on certain defined events (i.e. “triggers”) that occur within a defined geographic territory. They can pay out with or without the insured actually sustaining a loss, and they do not normally have restrictions of excluded perils or property covered that would be found in traditional insurance policies. In addition, payout can be very quick, often within just a few days of the triggering event. For these reasons, they are often used as supplements to traditional coverage, rather than as a replacement of traditional coverage.

Many types of insureds can benefit from utilizing parametric insurance, including those with exposure to weather volatility – such as coastal wind, earthquake, wildfire, drought, flood, or heavy snow – and those with the potential for business interruption or direct physical loss. It is also beneficial for businesses that value immediate cash flow in the event of a claim.

The flexibility to design the coverage triggers and subject geographies is one of the key advantages offered by parametric products. For example, an insured could have exposures in multiple counties close together, across an entire state, or across several states, and the parametric product and its coverage triggers can be designed for payout around those areas.

Expertise in this segment is very important for agents to ensure the product is clearly defined and understood by the buyer. The markets in this space are very analytically-driven; therefore, knowledge of modeling and how those figures can and will move, depending upon the slightest adjustments in the structure, is paramount.

Factors in Designing a Tailored Parametric Product

Unlike a traditional insurance policy, there are many levers to pull in designing a specific parametric product for any one insured’s needs. These levers afford the opportunity and flexibility to provide a menu of options at many different price points, often providing a more competitive product than is available in the traditional market. Additionally, the flexibility in structuring allows for the mitigation of any basis risk, thus limiting downside when compared to a traditional policy

Parametric products aim to complement insurance programs and buyers’ balance sheets in the following areas:


Since the parameters for coverage are pre-defined, the claims process for parametric products is quick and easy. Insureds complete a simple form, calculate the loss amount and submit to the carrier themselves. Claims adjusters are not required, so cash flow needs are addressed in a timely manner. This quick cash payout is often not possible with a traditional insurance product.



Coverage trigger mechanisms are defined prior to any event, including measurement sources and threshold structure for payout. The specific geography of the subject area is determined based on the unique insured’s needs and can be established using a variety of parameters, including latitude/longitude coordinates, counties, and zip codes. Boundaries are then established around the coordinates in order for the coverage to be triggered

For example, if heat index, measured rainfall, and hurricane wind speed thresholds, meet the pre-agreed trigger measurements within any geographic boundaries set, the coverage is triggered for payout. However, broader boundaries may affect pricing.


There are two options for structuring a parametric product: one that is indemnity-based, which is subject to actual losses, and one that is derivative-based, which is subject only to the trigger being met.

The indemnity-based option is usually more competitively priced, as it functions in the same manner as true insurance, in which the insured is indemnified for their loss and no more. The derivative option pays strictly based upon the parametric trigger, regardless of whether the insured has a loss or not. This structure is usually more expensive. Both options pay out extremely quickly, which is something a traditional insurance product cannot match.

As an example of the differences in structuring options, let’s consider an insured who has an exposure in tri-county Florida. The geographic trigger areas would be designed around these three counties for hurricane exposure, and various payout options would be set at different thresholds for the limit purchased (i.e. – various types of percentage of limit payouts at CAT levels desired, including 100% payouts for any and all categories).


  • Indemnity-based option: In the case of the Cat 1 threshold, for wind to force a payout for a limit purchased of $3M, the indemnity option would require the insured to provide a statement that they had, as an example, $2M of loss. The coverage would then pay for the $2M of loss.
  • Derivative-based option: The derivative form would simply pay out the $3M limit, regardless of the size of the loss.


Limits can be purchased as binary or stair-stepped payouts. The limit that the insured purchases does not affect the structuring of the product. The pricing is typically Rate on Line (ROL) based for the limit purchased. Therefore, if the limit is increased, the ROL typically doesn’t move. However, the dollar spend would increase.



Parametric products can attach ground-up or with a deductible. The deductible amount often doesn’t affect pricing, due to the product makeup and carrier appetites within this space. A zero-dollar deductible is usually preferred, as this is often not available with traditional products.



Access to ever-improving modeling techniques and overall historical data capture has allowed for the growth of parametric products. As agents and insureds look for the most efficient and flexible ways to protect their assets, the parametric landscape has increasingly played a major role in catastrophe-driven risk transfer. The number of carriers – and their willingness to be innovative – has also increased.

The Alternative Risk group at AmWINS continues to explore state-of-the-art options for customers, with a focus on hurricane/wind, earthquake, wildfire, temperature and various precipitation. Our specialists have extensive reinsurance backgrounds, as well as strong relationships and experience with various types of markets in the space. Our market access and expertise allow us to leverage the best products at the best prices.


About the Authors

This article was authored by Holland Walls, Robert Patterson and Kelly Greene, members of the Alternative Risk group at AmWINS.

Contact Us

To learn more about how AmWINS can help you place coverage for your clients, reach out to your local AmWINS broker.  If you do not have a contact at AmWINS, please click here.

Legal Disclaimer. Views expressed here do not constitute legal advice. The information contained herein is for general guidance of matter only and not for the purpose of providing legal advice. Discussion of insurance policy language is descriptive only. Every policy has different policy language. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions. Please refer to your policy for the actual language.

(c) 2017 AmWINS Group, Inc.

Most Popular Insights

From Seed to Sale: The Top 5 Issues Impacting the Cannabis Insurance Industry


​Over the last few years, the legal cannabis industry has seen rapid growth and had a significant impact on the U.S. economy. With states continuing to legalize its use, insurance needs for cannabis-related businesses are becoming a popular topic of discussion. This article examines the evolving cannabis industry by exploring five key issues impacting coverage.

Four Key Additional Insured Endorsements for Contractors

Construction contract negotiations, which determine the kind and amount of insurance required for a construction project, can be time-consuming, complicated and frustrating. Project owners require contractors on a project to name the project owner as an additional insured on the contractor’s casualty insurance program. It's important that both project owners and contractors understand the coverage provided by these additional insured endorsements. This article discusses four common ISO additional insured endorsements related to commercial general liability policies purchased by contractors, including their limitations, conditions and exclusions.

Claims Reporting: Better Late than Never?

A common complication during the claim process is the late reporting of claims. In some cases, a late claim can put the agent or broker's own E&O policy in jeopardy. There are many reasons for missing a reporting deadline; however, in most cases, they will not matter to the insurer or the courts. This article discusses typical claim reporting requirements, common causes of late reporting, and recommendations to mitigate the risk of late notice claim denials.

Understanding Property Theories of Recovery and Ensuing Loss Clauses

​The theories of recovery, as well as the ensuing loss provisions, contained in property insurance policies are often complex and, at times, seemingly in conflict. Although a policy may not directly address these theories, their application by courts plays a significant role in the coverage determination process after the claim. It is essential that brokers understand the primary theories of recovery – Efficient Proximate Cause, the Concurrent Causation Doctrine, and the Anti-Concurrent Causation Doctrine – in order to navigate the challenging post-claim process and effectively serve their clients.

Ordinance or Law Insurance Coverage

Ordinance or Law insurance coverage provides limited protection for costs associated with repairing, rebuilding, or constructing a structure when physical damage to the structure by a covered cause of loss triggers an ordinance or law. Compliance with ordinances and laws after a loss can add 50% or more to the cost of a claim. This article will help you educate your insureds on exclusions and limitations and help them take a proactive approach to their insurance program.

Employment Practices Liability in the Age of #MeToo

In 2017, the issue of sexual harassment – especially in the workplace – gained greater awareness as accusations of harassment by high-profile individuals were constantly in the news. In many cases, sexual harassment lawsuits seriously impacted businesses and their respective insurers. Employment Practices Liability Insurance not only provides protection against employee lawsuits, but can also help your clients mitigate their sexual harassment risks.

Sign Up For Our Monthly Newsletter

Sign Up