Advances in technology and access to reliable independent data are expanding the use of parametric insurance to cover a broader range of operational disruptions and catastrophe risks.

Ensuring the integrity of data and monitoring systems used to trigger payouts is critical because parametric policies rely on objective measurements, such as wind speed or rainfall, rather than traditional loss adjustment, brokers and insurers say.

Recent disputes involving weather data in other markets underscore how vulnerable such measurements can be. In a case unrelated to parametric insurance, French authorities in April launched an investigation into suspected manipulation of a weather sensor at Paris Charles de Gaulle Airport used to settle temperature-based bets on the prediction market platform Polymarket.

Questions about the integrity of weather data have also surfaced elsewhere. In 2024, two Colorado farmers were sentenced to federal prison for tampering with federal rain gauges to obtain larger federal crop insurance payments, according to the U.S. Department of Justice.

Ready access to independent data is fundamental to designing a parametric cover, said Michael Gruetzmacher, Aon’s head of alternative risk transfer for Commercial Risk Solutions in North America, who is based in Chicago.

Natural catastrophe and weather risks remain “fertile ground” for parametric insurance because of the availability of highly credible data sources, such as the National Hurricane Center, he said.

“The limiting factor is always going to be where is the data available, where we can describe these risk events in a very independent, transparent way,” Mr. Gruetzmacher said.

Independent data providers are essential because neither the insurer nor the policyholder should have a vested interest in the measurements used to trigger payouts, said Megan Linkin, New York-based head of parametric natural catastrophe for the Americas and senior vice president at Swiss Re Corporate Solutions.

Established providers include the United States Geological Survey, the National Hurricane Center and Moody’s HWind forecasting tool, which all have long track records of providing reliable data, she said.

For example, HWind combines reconnaissance flights, satellite data and ground observations, while the U.S. Geological Survey’s ShakeMap system draws on computer models, seismographs and public “Did You Feel It?” reports, Ms. Linkin said.

“When you have multiple sources of information going into data, it becomes even harder to manipulate,” she said.

Parametric contracts include safeguards to verify the integrity of the data used to trigger payouts, said Claire Wilkinson, London-based managing director of alternative risk transfer solutions at Willis Towers Watson.

If a weather station reports an anomalous reading, the calculation agent will compare it with data from nearby stations and other independent sources before determining whether a trigger has been met, she said.

“It has to be objective and independent, and people have to trust it,” Ms. Wilkinson said.

As more reliable datasets become available, insurers are beginning to consider additional sources, including shipping and government warning data, although established weather and climate data remain the foundation of most parametric policies, said Matt Dyk, Grand Rapids, Michigan-based parametric leader in Arthur J. Gallagher & Co.’s property practice.

Buyers should “check the correlation and have back testing done” to understand how a proposed parametric structure would have responded to previous events, he said.

Advances in satellite imagery and other data sources are allowing insurers to develop parametric products for more complex perils, including flood and severe convective storms, said Virgile Salmon, Paris-based parametric underwriter at Liberty Mutual Reinsurance.

These perils remain more difficult to model than earthquakes and hurricanes, he said. “This is definitely where there is a significant growth opportunity,” Mr. Salmon said.

Traditional business interruption claims can be lengthy and difficult to settle, said Sharon Haran, Tel Aviv, Israel-based chief commercial officer of Parametrix Insurance Services.

Buyers value the certainty of knowing in advance what they will be paid once a predefined trigger is met rather than waiting for losses to be adjusted, he said. “Getting this confidence that they will get the payment once a certain predefined clear trigger is met, they like it,” Mr. Haran said.

Payouts can be tailored to reflect exposure, such as $1 million per hour or $1 million per day for business interruption, or linked to metrics such as canceled flights, canceled medical treatments, transaction volumes or seasonal revenue, he said.

Parametrix recently launched parametric coverage for data center service-level agreement breaches, with payouts designed to mirror predefined SLA formulas, he said. For example, if power availability falls below an agreed threshold, the policy pays an amount that can be used to fund service credits owed to tenants under the operator’s contractual obligations, he said.

Alternative coverages expand despite softening traditional market

Demand for parametric insurance continues to grow despite softening property insurance pricing, as buyers seek faster payouts and broader coverage.

The parametric insurance market is projected to reach $63.8 billion by 2035 (see chart), representing a 12.2% compound annual growth rate, according to USI Insurance Services’ midyear commercial property/casualty market outlook.

Commercial property insurance pricing has eased over the past 18 months, but many buyers continue to purchase parametric coverage because they value its ability to complement traditional property policies rather than replace them, said Claire Wilkinson, London-based managing director of alternative risk transfer solutions at Willis Towers Watson.

Buyers increasingly recognize the benefits of rapid payouts, the absence of a loss adjustment process and the flexibility to use payouts to address financial losses such as business interruption following a catastrophe, she said.

Parametric coverage is expanding to address financial losses from extreme heat and cold, including construction projects where excessive heat can limit working hours under safety regulations and businesses face higher operating costs or infrastructure disruptions, said Matt Dyk, Grand Rapids, Michigan-based parametric leader in Arthur J. Gallagher & Co.’s property practice.

Supply chain exposures can also be covered, said Michael Gruetzmacher, Aon’s head of alternative risk transfer, commercial risk solutions, North America, who is based in Chicago.

For example, a business dependent on the Port of Long Beach could purchase coverage triggered by an earthquake affecting the port, providing liquidity to help offset higher transportation costs and other disruption-related expenses, he said.

While conventional property insurance efficiently covers physical damage, parametric policies can address contingent exposures and other financial risks that traditional property policies may not cover, said Megan Linkin, New York-based head of parametric natural catastrophe for the Americas and senior vice president at Swiss Re Corporate Solutions. For example, a business could use the payout to buy temporary generators after a natural catastrophe causes a power outage.