Parametric coverages are playing a growing role in mitigating environmental, social and governance-related risks such as climate change, cyber and reputational harm, experts say.

Policies based on parametric triggers can offer buyers an alternative structure to cover key risks, especially when gaps in traditional coverage may exist.

Parametric coverage is increasingly being used to mitigate climate change risks, said Daniel Drennen, national environmental practice leader at Amwins Group Inc. in Atlanta. “Whether it be hurricanes, specific wind and flooding events, they are becoming more mainstream,” he said.

Steel City Re LLC, a Pittsburgh-based parametrics insurer for reputation risk, last September launched a modified version of its parametric coverage designed to cover boards of directors from ESG issues, said CEO Nir Kossovsky. 

The policy pays out for a range of costs a business may incur due to extraordinary “strategic managerial and governance actions signaling corporate values” that may arise in the context of an ESG crisis such as a product recall, cyber incident or employee liability event, Steel City Re said. 

The policy is designed as an additional level of protection to a captive insurer, Mr. Kossovsky said. A synthetic index of reputational value called the RVM Index is the parameter underpinning the coverage. Payment is triggered if a company’s RVM index value dips below a trigger value for 20 weeks following an adverse event.

While parametric coverage is not new, it is seeing greater use, said Jessica Botelho-Young, associate director, analytics, at Oldwick, New Jersey-based ratings agency A.M. Best. Co. Inc.

Parametric insurance serves a dual purpose by “providing cover and quickly closing the protection gap in underserved communities,” Ms. Botelho-Young said.

Parametrics also contribute to microinsurance, which is another area where insurers have developed coverages in the agricultural sector, improving financial inclusion, she said.

Nature-based insurance designed to facilitate recovery and restoration activity of natural assets, such as coral reefs in the wake of hurricane damage, have also incorporated parametric coverage.

Parametric triggers offer a faster payout than traditional insurance and require no loss assessment. The level of payout is based on a triggering event that exceeds a certain threshold, such as hurricane wind speed, temperature or rainfall total that is measured by a third-party index.