Viewpoint: Captives, parametrics meet

Parametric insurance, once viewed primarily as a fast-track mechanism for payouts following hurricanes, has evolved and is playing a more significant role in the captive insurance sector, judging by conversations at recent risk conferences.

Figures vary, but globally, the parametric insurance market was valued at $16.2 billion in 2024 and is projected to reach $51.3 billion by 2034, according to a report issued by Research and Markets. The U.S. parametric insurance market was valued at $5.5 billion in 2024, according to the report. Technological advancements, shifting economic conditions and the increasing frequency of weather-related disasters are fueling the growth.

Brokers and specialty providers have long promoted parametric policies as complementary to traditional insurance programs. Unlike indemnity-based coverage, parametric insurance triggers a payout when specific, predefined parameters are reached, such as wind speed, earthquake magnitude, rainfall level, temperature, or economic metrics like declines in sales or decreases in foot traffic. Crucially, whether the trigger has been met is based on information from an independent third-party data provider, resulting in faster payouts, regardless of whether a business incurs a physical loss.

Hardening commercial insurance rates have spurred increased growth in alternative risk transfer vehicles over the past few years, and the captive sector in particular has benefited, experiencing what many have described as “a golden era” and a surge in interest from companies. During the same period, parametric coverages have increasingly been used to fill coverage gaps and to buy down deductibles.

At the Bermuda Captive Conference in June, attendees learned how parametric insurance is addressing natural catastrophe and supply chain risks written by captives. Many domiciles allow captive owners to incorporate parametric structures into captives, and some explicitly authorize it in their laws.

Consider flooding, for instance. Because the willingness of private insurers to provide flood coverage is limited, it’s challenging to insure certain businesses, such as open-lot dealers and golf courses. Flooding can cause substantial business interruption losses. With a captive insurer and a parametric policy that specifies certain parameters — such as water depth at a designated location based on readings from sensors on the property — flood coverage and payouts can be customized for the parent company. If a captive takes on a unique risk, such as wildfire or cyber, it can use data and analytics to assess the risk and determine how to structure coverage for optimal relief.

Parametric coverages aren’t a panacea for all risks and all companies, however. Basis risk – the risk that the policy payout won’t perfectly align with the damage suffered – can be a deterrent. If the pre-defined event trigger isn’t met, the policy won’t pay out even if a business sustains significant damage.

Cost is another concern. Parametric policies must be competitively priced, even if they differ from traditional coverage and offer faster claims payouts.

Now that rate increases have slowed, the question is whether companies will scale back their use of self-insurance vehicles, transfer some risk back to traditional markets and perhaps be less inclined to add lines to their captives or explore parametric coverages. That does not appear to be the case, based on the innovative structures and coverages being fostered by leading domiciles.