Parametric coverage for wildfire exposures is gaining traction amid a challenging environment for catastrophe-exposed property risks.

Improved data sources and satellite imagery are also among the reasons for the broader uptake because better data translates to improved coverage trigger designs and increased confidence among users, experts say.

“Wildfire is a clear use case for parametric because it is easy to measure,” said Laurent Sabatié, co-founder and executive director of London-based Skyline Partners Ltd., an insurtech managing general agent that specializes in parametric coverage. 

With the traditional property insurance market hardening, capacity for wildfire risks declining and retentions rising, parametric coverage can help provide additional capacity.

“We definitely are receiving more inquiries about parametric wildfire coverage, mainly due to the capacity reduction in the indemnity market,” said Jacob Choi, New York-based global head of analytics within Marsh Specialty’s parametric solutions group.

“Capacity weaknesses” in the property catastrophe market are likely to continue for “the foreseeable future,” said Paul Schultz, Chicago-based CEO of Aon Securities, a unit of Aon PLC, and parametric coverage provides another option to such challenges.

Underwriters in the wildfire sector are “tentative ” and concerned about being compensated adequately for the risks they assume or weary of the volatility involved, prompting some to decrease writings, Mr. Schultz said.

“We see parametrics as one of our key strategies going forward,” particularly with wildfire, which is among the so-called “secondary perils” along with severe convective storm, he said.

As traditional underwriters turn away from wildfire, some commercial policyholders seeking coverage turn to the parametric market.

“We’re fielding increased numbers of inquiries about wildfire, inevitably due in part to the hardening indemnity market, but also because the risk environment is more complex due to climate change. The retreat of the current traditional market in California has reduced capacity available, with severe spikes in retentions and deductibles imposed by commercial carriers,” said Sébastien Piguet, chief underwriting officer for Paris-based Descartes Underwriting SAS, a parametric insurance managing general agent.

Several large personal lines insurers, including State Farm Mutual Automobile Insurance Co. and Allstate Insurance Co., recently announced they will stop writing new commercial and personal property insurance in California due to increased wildfire risks, among other things.

There has been a “very significant” increase in interest in parametric coverage, and that “translates into getting more deals done,” said Cole Mayer, San Francisco-based head of parametric for Aon PLC, who recently joined the brokerage from Swiss Re Corporate Solutions, part of Swiss Re Ltd.

There were 7.5 million acres in the U.S. burned by wildfire in 2022, near the 10-year average of 7.3 million acres, according to a June report from Gallagher Re, the reinsurance brokerage unit of Arthur J. Gallagher & Co. The number of fires reported rose to 68,988 from 58,985 in 2021, according to the report.

While Alaska and portions of the Southwest saw an active wildfire season the rest of the nation saw below-average wildfire activity. California, which in 2020 and 2021 had wildfire losses of 4.4 million acres and 2.6 million acres, respectively, saw just 363,939 acres burned in 2022, report data showed.

Improved data in the forms of higher-resolution imagery and better availability also helped in the development of parametric coverage by allowing for better design of triggers and new indices, sources said, such as the percentage burned of an asset base of a forestry operation.

“New data from commercial and public satellites like Sentinel 2 has contributed significantly to the market’s growth, offering high-resolution imagery efficiently,” said Kevin Dedieu, chief research and development officer for Descartes.

“The combination of enhanced data, more research, and improved modeling enables the insurance industry to detect and monitor wildfire events with increased accuracy in a near real-time basis,” Mr. Choi said.

Skyline’s Mr. Sabatié said Landsat is used extensively by the insurance industry. The Landsat program, jointly managed by NASA and the U.S. Geological Survey, is a series of Earth-observing satellite missions, which now consists of orbiting and active satellites Landsat 8 and Landsat 9, according to the USGS.

“Ultimately, data and information on the losses is what informs about the risk” and whether it can or should be covered, Mr. Sabatié said.

Sources said parametric coverage can be used by itself or in conjunction with traditional indemnity insurance.

“Our clients are able to use parametric wildfire as a standalone policy or as an additional coverage in order to fill gaps in coverage, such as non-damage business interruptions,  or be used as a deductible buydown,” Marsh’s  Mr. Choi said. Typical parametric clients can include forestry operations and wineries, he added.

“Parametric can help expand the scope of coverage and tools for risks like wildfire that previously our clients couldn’t adequately transfer,” Mr. Mayer said.