Parametric Insurance: The Future of Supplemental Risk Management

• Pages: 28-35
• Date: 01 October 2025
• Published date: 01 October 2025
• Author: Ryan P. O'Shea
• Subject Matter: Derecho Público y Administrativo

28 THE BRIEF ❭ Fall 2025

PUBLISHE D IN THE BRIEF, VOLUME 55, NUMBE R 1, FALL 2025. © 2025 BY THE AME RICAN BAR ASSO CIATION. REPRODUCE D WITH PERMISSION . ALL RIGHTS RESER VED. THIS INFORMATIO N OR ANY

PORTION T HEREOF MAY NOT BE COP IED OR DISSEMIN ATED IN ANY FORM OR B Y ANY MEANS OR S TORED IN AN ELEC TRONIC DATABAS E OR RETRIE VAL SYSTEM WI THOUT THE EX PRESS WRIT TEN CONSEN T

OF THE AMERIC AN BAR ASSO CIATION.

As natural catastrophes increase globally in both size and

frequency, the question arises as to how both public

and private entities can protect themselves from the

resultant f‌inancial losses. Munich Re estimated that global

natural catastrophes caused $270 billion in economic losses

in 2022, but only $120 billion of these losses were insured.1

Swiss Re Institute revealed that around $280 billion in eco-

nomic losses occurred in 2023.2 In 2024, the United States

alone sustained $27 billion in losses caused by weather-related

disasters.3 In an alarming sign of sensitivity to the growing

risk, some insurers are withdrawing from states highly

aected by natural disasters, including Florida and California.4

In this context, growing consideration is being given to

using parametric insurance as a complement to traditional

indemnity-based insurance contracts.5

Most people’s understanding of insurance is based on the

traditional insurance model. Under the traditional model,

when physical damage occurs to an insured object, such as

a vehicle, a claim is f‌iled, an investigation occurs, and the

insurer either denies or pays the claim. However, there is a

niche form of insurance that is gaining popularity and appli-

cability due to advances in technology as well as more reliable

data measurements. This risk transfer model is parametric

insurance, which is gaining credibility as a gap f‌iller for losses

that are typically left uninsured by traditional policies.

This article explores the basics of parametric insurance; its

origins, history, and current and future applications; its chal-

lenges, drawbacks, and limitations; and two examples of how

parametric policies can function as supplementary insurance.

The Basics of Parametric Insurance

and Its Structural Elements

As its name suggests, parametric insurance coverage is

triggered upon the occurrence of a specif‌ic event known

as a “trigger event.”6 Once the trigger event meets a pre-

def‌ined parameter, a prearranged exact indemnity amount is

paid.7 This type of risk transfer is composed of three design

elements: (1) an objective measurable index quantif‌ies the

specif‌ic event; (2) the event meets or exceeds the index’s pre-

def‌ined threshold; and (3) the payout occurs according to the

prearranged payout structure.8 In its def‌inition of parametric

insurance, Swiss Re expands on these conditions by def‌ining

a parametric product’s elements as (1) a pre-agreed settlement

amount, (2) a predef‌ined triggering event, (3) a predef‌ined

index that serves as the proxy for a f‌inancial loss, and (4) an

insurable interest.9

Parametric

Insurance:

The Future of

Supplemental Risk

Management

By Ryan P. O’Shea

VAWILEY/E+ VIA GETT Y IMAGES