Sharp increases in insurance pricing are driving more interest in alternative coverage, including insurance products for which claims triggers are based on data points, such as climatic data, usually provided by an independent, verifiable third party.

So-called parametric coverage is underwritten differently, using third-party index data instead of an insured’s loss history, and the scope of application is expanding beyond core natural catastrophe coverage, experts say.

“Everybody is looking for additional resources to tackle risks,” said Stephane Godier, Santiago, Chile-based regional head Americas, Axa Climate, a division of Axa SA, especially in areas where capacity is scarce, such as for tropical cyclone risk in the Gulf of Mexico.

The hardening market “does open the door for the conversation,” said Evan Stait, commercial account executive at Hub International Ltd. in Kelowna, British Columbia, adding that roughly three in 10 prospects “pull the trigger.”

“Certainly, the hardening market is causing clients to look at alternatives to traditional insurance,” said Paul Ramiz, director of Aon PLC’s innovations and solutions team in London. “If you are having a hard renewal, or if you are struggling for capacity, there’s an alternate market you can talk to.”

Parametric products applied to catastrophe risks “cycle based on factors including when general indemnity and conventional markets harden,” said Chad Wright, head of risk analytics and alternative risk transfer in the United States and Canada for Marsh LLC in Atlanta.

There is more traction than prior to the hardening market to use parametric coverages, Mr. Godier said, especially using the products for a deductible buy down, “because this is where the solutions are more efficient.” A policyholder can start with a first layer of parametric coverage and then attach higher on the traditional program, he said.

Parametric products for natural catastrophes such as earthquake and hurricane were the first to be introduced, about 20 years ago. More recently, parametric products have been developed for other perils, including hail, drought and other weather events, Mr. Wright said. 

“Excessive rain, excessive snowfall, lack of snowfall are all solutions we have in our portfolio,” he said, adding that Marsh also has a product for pandemic-related risks based on a parametric trigger.

For example, a parametric contract can be based on whether a specific location exceeds a given amount of snow within a defined time frame.

“There is an increase in people investigating alternative products — non-damage business interruption triggers, for example,” said Mr. Ramiz of Aon (see related story). The mature end of the market, however, is in the weather and natural catastrophe perils, such as wind and earthquake, he said.

Aon had its “best year to date” for parametrics in 2020, and there has been a “huge uptick in inquiries,” he said.

Aon placed more than $500 million in coverage through parametric products in 2020, including its biggest ever parametric deal for one client, north of $300 million in limit, Mr. Ramiz said.

“Years ago, you had to go to the capital markets for substantial limits,” said Mr. Wright of Marsh. “Now, insurers are putting more and more money into these types of solutions. Some markets will do hundreds of millions of dollars, and there are limits as high as $500 million for earthquake.”

Parametric coverage offers capacity “that wants to take risk,” and as property insurance prices have hardened, there is less difference in pricing between traditional coverage and parametric coverage, he said.

The two types of coverage can also be employed in tandem. 

“Parametric insurance can work in a great way to be a companion piece to complete a standard insurance offering,” said Jonathan Charak, emerging solutions director in Schaumburg, Illinois, for Zurich North America. 

Parametric coverage is generally used to supplement and complement traditional coverage, not to replace it, Mr. Ramiz said. There is precedent, however, for a client removing all wind from its traditional portfolio and replacing it with parametric cover, he said.

Scott Carpinteri, senior vice president, innovative risk solutions, at Swiss Re Corporate Solutions, said parametric insurance is a different product from an indemnity contract.

“It doesn’t have a deductible, it doesn’t really have exclusions, and it doesn’t require a damage trigger,” he said. In addition, the documentation is usually simpler and averages about 15 pages. 

Swiss Re Corporate Solutions’ online parametric hurricane coverage platform Pop Storm allows users to purchase coverage online based on trigger and payout tables.

Hub’s Mr. Stait said parametric coverage also differs from traditional coverage because the underwriting process does not take loss history into account. “It’s all data driven,” he said.

Underwriters need at least 25 years of data without gaps, such as weather data from the U.S. National Oceanic and Atmospheric Administration, to cover the risks, Mr. Ramiz said. Data derived from other areas, such as through telematics, is still “immature” to underpin parametric insurance, he said.