By Meryl Bermond, Captive Insurer Lead, Descartes Underwriting. This piece builds on an article first published in Captive International—see the original version here.
Why Are Captives Turning to Parametric Insurance?
Captive insurers are no strangers to volatility. The greatest challenge they face when working with commercial markets is the cyclicality of insurance pricing. Premiums for the same coverage can swing by hundreds of percent within a year or two, creating uncertainty and leaving captives exposed.
Parametric insurance offers a way out of this cycle by providing stable, risk-based premiums. Instead of depending on market dynamics or loss history, parametric policies are priced according to the likelihood of specific events. This ensures that captives receive transparent, fair pricing aligned with their true risk exposure.
What Is Parametric Insurance?
Parametric insurance is event-triggered coverage. It pays a pre-agreed amount when a measurable index—such as windspeed, rainfall, or earthquake acceleration—reaches a threshold.
- Premiums are risk-based: priced according to probability and intensity, not past claims.
- Payouts are automatic: claims are settled when the trigger is met.
- No disputes: the model removes lengthy assessments of physical damage.
Example:
- An earthquake with Peak Ground Acceleration (PGA) of 0.8g → payout of $4M
- An earthquake with PGA of 0.6g → payout of $2M
Scalable payouts: Many policies use graduated triggers, where payouts increase with event intensity, aligning indemnity more closely with actual loss. This ensures coverage feels fair and relevant to the insured, while remaining scientifically priced.
Forward-Looking Pricing for Captives
Unlike traditional insurance, parametric structures are loss-record agnostic. A captive with multiple flood claims in recent years is not penalized with higher unit pricing. Instead, the policy is priced solely on the probability of floods occurring at each insured location.
This distinction is critical. Traditional models react to history, but parametric looks ahead. Captives that improve their risk management can reduce the scope of coverage to higher-severity events, thereby lowering costs—without the market penalizing them for past performance.
For captives, parametric insurance rewards proactive risk management and ensures premiums are tied to exposure, not to yesterday’s claims.
Why Are Natural Perils Well-suited to Parametric Insurance?
Natural catastrophes pose the largest accumulation risk for captives. A single event—hurricane, flood, wildfire—can strike multiple assets at once. Conventional “all-risks” policies often bundle these exposures with fire, theft, or riots, but rarely price nat cat fairly.
Common shortcomings in traditional policies include:
- Underpricing or ignoring secondary perils like hail and flood
- Imposing strict sub-limits for accumulation risk
- Withdrawing capacity in high-risk regions (Florida hurricanes, California wildfires)
Parametric advantage:
- Coverage carved out and priced correctly on its own terms
- Advanced data and modeling ensure accuracy
- Climate change trends explicitly built into pricing
- Structures that create a broad safety net, protecting captives from multiple natural perils with clarity and certainty.
Natural Perils in Traditional vs. Parametric Insurance
Aspect | Traditional Insurance | Parametric Insurance |
Pricing | Based on market cycles & loss history | Based on event likelihood & severity |
Coverage | Exclusions & sub-limits common | Full coverage for chosen perils |
Claims | Slow, subjective, often disputed | Fast, objective, automatic |
Climate change | Difficult to price fairly | Explicitly factored into models |
This shift allows captives to secure protection where conventional capacity is limited—or nonexistent.
Capturing the Overlooked Risks: Hail and Flood
Take hail risk. Under property policies, hail is usually bundled without explicit pricing. In practice, it is often given away for free. When a hail claim is made, premiums must rise later to cover the shortfall.
Parametric hail insurance corrects this distortion:
- Pricing is based on hailstone size and storm intensity.
- Advanced models determine likelihood and severity at each location.
- Captives receive detailed pricing information, ensuring adequate premiums to withstand rising hail events.
Similarly, flood risk is modeled per site. Whether a captive has suffered three or thirty claims, pricing depends only on the flood probability—not history. This ensures fair treatment and encourages better risk management.
Competent parametric underwriters will also back-test a captive’s loss portfolio. They demonstrate how parametric coverage would have responded to actual past events, providing clarity and confidence to captive managers.
Can Parametric Insurance Cover Business Interruption Without Damage?
Yes, and this is one of its most powerful advantages. Conventional business interruption (BI) requires physical loss to trigger coverage. But as businesses know, operations can grind to a halt without a single building being damaged.
Examples:
- Supply chain disruption: An earthquake in Taiwan halts microchip supply. A US manufacturer is forced to stop operations. A parametric earthquake cover pays quickly, no matter where the damage occurred.
- Access interruption: A hurricane leaves a shopping mall undamaged but inaccessible due to flooded roads and evacuation orders. A parametric windspeed trigger ensures payment, even with no physical damage.
Parametric insurance empowers captives to secure coverage for non-damage business interruption (NDBI)—a risk that is costly, underinsured, and difficult to address with conventional markets.
Why Captives Should Act Now
The captive sector has always been a pioneer in alternative risk transfer. Parametric insurance strengthens that tradition by:
- Delivering risk-based, stable pricing in volatile markets
- Ensuring fast, dispute-free payouts through objective triggers
- Covering hard-to-insure perils (hail, flood, wildfire, hurricane)
- Providing robust protection against business interruption, even without damage
- Rewarding risk mitigation with lower costs, not higher premiums
- Creating a broad safety net against climate-driven and systemic risks
Parametric insurance is a strategic advantage that helps captives achieve continuity, price stability, and resilience in an era defined by uncertainty.
FAQ: People Also Ask
Q1. What is parametric insurance in simple terms?
Parametric insurance is event-based coverage that pays a fixed amount when an index, such as windspeed or rainfall, is met. It does not require proof of physical damage.
Q2. How does parametric insurance benefit captives?
It provides stable, transparent pricing based on event risk, ensures rapid payouts, and eliminates disputes tied to loss assessments.
Q3. What risks are best suited for parametric coverage?
Natural catastrophes like hurricanes, floods, hail, and wildfires, as well as business interruption risks from supply chain or access disruption.
Q4. Does parametric insurance consider past losses?
No. It is priced solely on event probability and severity, not on a captive’s historical claims record.
Q5. How quickly are claims paid?
Since payouts are tied to measurable indices, claims can be settled within weeks rather than months.