Editor’s note: This article is the sixth installment in the 2025 Future of Risk series, which explores the rise of systemic risks — threats that are difficult to predict, span industries and carry the potential for widespread disruption. This piece examines parametric insurance and how it can help build resilience against these risks.
Climate volatility, natural disasters and supply chain disruptions create systemic risks — where the ripple effects of a single event stretch across industries and borders. Wildfires in Canada can idle U.S. factories. A drought in Argentina can have a ripple effect on global commodity markets. A hurricane can knock out local infrastructure and international trade routes.
Traditional insurance isn’t always efficient in this environment of extreme risk. Indemnity-based coverage requires lengthy claims processes, on-the-ground assessments and negotiations over coverage, sublimits and exclusions. When you’re facing business losses, that lag time can be debilitating.
Parametric insurance can help you build resilience against these risks.
Parametric insurance is an index-based coverage that pays out based on a predefined event or trigger, as opposed to traditional indemnity-based insurance policies. Instead of waiting for an adjuster to measure the actual damage, the policy is connected to objective data points like maximum wind speeds during a hurricane, total rainfall during a drought or seismic readings during an earthquake. If the agreed-upon threshold is triggered, the payout is made automatically, typically within a few days.
While parametric insurance has gained broader attention recently, it is not a new concept; however, it is reshaping how you can prepare for and respond to economic disruption. Here are a few reasons why parametric insurance plays a pivotal role in the future of risk management:
When disaster strikes, timing is everything. Traditional insurance claims can sometimes take months. Parametric policies, by contrast, can pay out within days because they depend on objective data rather than on-site inspections. That speed allows you to deploy capital immediately, whether to restart operations, protect employees or stabilize cash flow.
Because parametric policies link payouts to predefined parameters, there is less ambiguity. You know in advance what triggers coverage and what the payout will be. This reduces disputes and builds confidence in risk planning.
Systemic risks span multiple industries and geographies and can be expensive or challenging to insure through traditional means. Parametric insurance addresses this issue by tying coverage to specific events, such as hurricanes, earthquakes, droughts or supply chain disruptions. It injects liquidity when and where it’s needed most.
Although parametric products gained traction in property insurance, diverse industries are now recognizing their utility. Each faces systemic risks that traditional insurance may struggle to address efficiently on its own.
Parametric insurance is already helping businesses prepare for, withstand and recover from disruption. Here are a few examples:
Across industries, parametric coverage provides organizations with a predictable safety net when disruptions occur.
Parametric insurance isn’t a replacement for traditional policies; it’s a companion.
Let’s say a business purchases a parametric policy activated by a Category 3 hurricane to cover cash flow needs and holds a traditional property policy to cover specific damage. If the hurricane strikes but causes minimal property damage, the parametric policy still pays out, providing crucial liquidity even when traditional coverage doesn’t apply.
This dual-layered approach builds resilience.
Parametric insurance represents a turning point in how organizations can manage risk in the years ahead. By shifting the focus from damage assessment to objective, data-driven triggers, it introduces a level of speed, transparency and flexibility that traditional models can’t match. As climate volatility, natural disasters and supply chain disruptions continue to intensify, parametric insurance is gaining momentum.
Carl Smith leads the Property practice and specializes in complex risk management for U.S. and multinational customers. With experience across industries like healthcare, real estate, manufacturing and technology, Carl develops innovative solutions – including parametric options – to help customers navigate risks and build resilience.
Greg Knapic is a senior director in the Property practice, specializing in managing large, complex property placements on a global scale, including builder's risk. Greg ensures placements are tailored to customer needs, incorporating alternative risk financing solutions such as captives, loss funding and parametric options.