When working with commercial clients, there are circumstances under which the insurance solutions available might be ok, but they’re not perfect. Sub limits, high deductibles and restrictive terms, perhaps the remnants of hard markets in recent history, can leave companies exposed to risks they may not want to self-insure.
Similarly, sometimes risks – traditional risks, non-traditional risks and emerging risks – are just not insurable. There is no perfect way to insure the risks using traditional policies. (An earthquake deductible on a $2-million building could be $400,000, for example. In another example, traditional insurers may not be willing to extend earthquake coverage at all in certain zones.)
Faced with these cases, brokers’ options are not unlimited, but there is a product which can fill the gaps. It is not new in Canada, but it is undergoing a significant evolution of late and would appear to be poised for new growth as it is increasingly sold alongside traditional commercial policies.
Enter parametric insurance
Insurance products are seldom described as being cool, creative, really interesting or exciting, but all of these can actually be said of the product, particularly given recent advancements in data science which appear ready to help explode the product’s development possibilities.
Bespoke, but simple, and in most cases, very, very specific, parametric insurance is a coverage for those with an insurable interest, which pays out when a certain triggering condition or threshold is met. In all cases, the triggers must be those which are independently verified by an agreed-upon third party. Natural catastrophe and weather-related coverage is typical, although those watching the market say cyber event coverage may not be that far into the future.
It’s developed a lot…Parametric is huge in the farming community. - James King
Traditionally underwritten for large corporate clients, municipalities and other large groups, parametric insurance is popular in the farming community and, given the advancements in technology, it could in the future become increasingly available to smaller companies, as well.
Aviva, for instance, is a relatively recent entrant to the market. It piloted its parametric offering – two rainfall related products – with three brokerages, beginning in December 2023. In October 2024 it launched three additional temperature-related products and began enrolling additional brokers to its platform.
“The requirements are quite small in order to generate a policy,” says Aviva’s James King, head of fronting with the company’s global, corporate and specialty team. “Every broker can demonstrate it,” he adds. “This is now available to smaller organizations.”
Where the coverage was once developed for energy producers concerned about weather’s impact on their ability to sell sufficient power into the grid in one example, it has since grown, predominantly focusing on weather-related and natural catastrophe triggers. “It’s developed a lot,” King adds. “Parametric is huge in the farming community.”
It is a much more transparent and typically quicker to settle form of insurance than a traditional direct damage policy. - Jason Wallace
Youssef Baki, senior structurer, alternative risk transfer with Swiss Re Corporate Solutions says parametric insurance began emerging as a viable solution in the hard market years leading up to the pandemic, where buyers were faced with higher traditional premiums, reduced capacity and more restrictive terms and conditions. “That certainly helped accelerate the adoption of parametric insurance in Canada,” he says. “We saw parametric come in and really fill some of those coverage gaps left under traditional insurance.”
He adds during that time, marked as it was with a lot of uncertainty for companies, parametric was very well received for its relative transparency and simplicity. “Parametric is just another tool in a risk manager’s toolbox that can be used to fill in those coverage gaps,” he says. (Swiss Re has been in the parametric insurance space in Canada since the late 1990s.)
The value proposition of parametric insurance is this: That when a triggering event or condition is met, the policy pays out the specified benefit – no claims adjusters or engineers required. Because of this, the product generally pays out quickly.
“It is a much more transparent and typically quicker to settle form of insurance than a traditional direct damage policy,” says Jason Wallace, director of market relations and business development with Western Financial Group, who adds that policies, particularly in the large client space, are very tailored and customizable. “It’s an innovative way to transfer some risk in a non-traditional way.”
In addition to hard market conditions, extreme weather conditions and natural catastrophes are becoming more prevalent, also causing companies to gain a better appreciation for their exposures and their existing coverage’s limitations.
Pockets of growth, specifically in Canada, are being observed by companies like Swiss Re in British Columbia (earthquake exposure), in Eastern provinces exposed to hurricane risk and among Canadian corporates with exposure in the gulf states and Caribbean.
“Almost every sector in the economy will have some type of exposure to natural catastrophe and will have an interest in understanding what options are available,” Baki says.
Parametric use cases
Business continuity expenses will be a concern for one client, while covering off an insurance deductible without it affecting the company’s bottom line is what will drive the next buyer.
- Whether renting out cottages or sponsoring an event, negative experiences related to the weather can be detrimental to those dependent on delivering a positive customer experience. In such cases, a parametric product can help offset the cost of providing coupons to ensure those customers return again.
- Lenders on commercial mortgages may require parametric coverage sufficient to cover existing deductibles in a catastrophe situation.
- Crop producers can reasonably look to obtain parametric coverage if rainfall does not exceed a certain threshold within a certain time period.
- More “off the shelf” coverage includes rain-out insurance for parades or festivals. Rain-out insurance for an event can cover the sudden cost of moving things indoors. Prize indemnity insurance can be considered parametric, as well.
- Municipalities may have underinsured assets and a need for recovery financing.
- Solar companies are able to buy parametric insurance against the possibility there won’t be sufficient hours of sunlight during a set period.
- Prominent hotels in large centres currently purchase parametric insurance because it makes sense within the context of their own risk profile, to pay the premiums to protect the hotel’s business in the event of an earthquake or flash flood.
- Businesses responding to high catastrophe deductibles and sub limits are using parametric insurance to close their exposure gaps.
“The use cases are going to be very different from one client to the next. That’s the really fun part about the job,” Baki says, who adds that clients are generally very appreciative of how the coverage works in practice. “The neat thing about parametric insurance is that we play a key role in helping customers take control of their risk.”
The market is not without its challenges. To start, anecdotally, it is not a huge and booming market. Although very large carriers have operated in the space for years, Aviva, for example, does not expect to gain traction until sometime in 2026. At Swiss Re, meanwhile, Baki observes that larger commercial brokerages are also starting to develop parametric teams.
“Our broker partners definitely play a key role in the product education process,” he says. (The product’s challenges include the ongoing need for education as, outside of just a few business communities, parametric insurance is generally an unheard-of product.) “As a big carrier, we certainly welcome this specialization,” he says. “It’s one that will certainly contribute to the growth of the market.”
Wallace also notes the need for education as another product challenge. “It’s not a kitchen table type policy,” he says. “Most people outside of the business probably wouldn’t even know what it is.”
He adds that the coverage is not something every insurer is looking to take on. The coverage is not something every broker is familiar with either. “It’s very much a specialty product,” he says. “It largely exists for very niche things.”
Although data science may well be what underpins the next innovative trigger, as is the case in other areas of the business, attracting those with the necessary experience could be a challenge.
Then there is the cost.
“I think you would need a very good reason to buy it,” Wallace agrees. “It’s not well understood, by and large, and it tends to carry fairly high premiums. I think a barrier to entry is probably cost in a lot of cases.”
The cost, in turn, tends to fuel misconceptions about the product.
“The truth here is that you can’t really compare parametric and traditional insurance products like for like,” Baki says. “These products are very different. They work differently and they respond differently. They shouldn’t be compared apples to apples.”
Finally, as with most things, technology is also poised to perhaps disrupt and enable the product’s further development, broadening the available, measurable triggers while also enabling greater analysis and risk assessment, thanks to more accurate meteorological forecasting.
“I think as insurers and capital providers behind the scenes get more comfortable with data they’re going to be able to invest more in it,” Wallace agrees. “Just the ability to analyze more and more data, massive amounts of data, I think that’s going to be a big driver, for sure.”
The future of parametric insurance
Across the board, those discussing the matter with the Insurance Portal say they expect to see more parametric insurance being sold going forward, due to the increase in climate-related natural catastrophes. Although cyber coverage is coming too, they say weather and natural catastrophe coverages are likely where insurers are going to expand their offerings to start.
More is expected in the smaller client space, as well. “My experience has always been in the very large space,” Wallace says, “but I wouldn’t rule out more parametric solutions coming as risk continues to evolve.”