Parametric insurance: Better protection for your business against climate-related risks

Speed of claims payout is one of the main advantages of parametric insurance over traditional coverage.

Another is the breadth of financial loss that can be claimed in the payout of these policies. They go far beyond what is covered by a traditional policy and can really supplement existing coverage, even in a time of rate stabilization and a softening market.

While traditional claims can take months to resolve, parametric claims usually pay out within 10 to 30 days. This means liquidity for the business during that critical recovery period.

By contrast, standard claims can take months or even years to settle, and usually only after the damage and business interruption has been validated by insurance adjusters. This delay in payment can leave businesses struggling to reopen at a time when funding is critical to rebuild and reopen.

For example, an agricultural business dealing with a severe drought or a live event planner who lost revenue because of a hurricane may find themselves in a challenging position as they work to prove their loss.

If these same businesses had supplemental parametric coverage, they would qualify for a payout as soon as the pre-determined damage triggers were met. In most policies, parametric insurance pays out automatically once the qualifying event occurs, whether the business sustains direct damage from the event or not. Insurance specialists working on parametric policies generally use historical information to back test the coverage trigger points, as well as to determine premium and payout levels.

Besides speed, parametric policies are attractive to businesses for various reasons, including:

• Simplicity: The adjustment process is much more straightforward compared to that of traditional insurance. Once an event is determined to have hit a pre-agreed trigger point, coverage applies and the payment process begins.
• Transparency: Pricing is created through a simple calculation based on peril type, geographic exposure, historical frequency data and trigger sensitivity. Through this calculation, a $10 million policy with a 2% rate online would cost $200,000.
• Uniqueness: Each policy is unique and customized to your specific business and the risks it faces every day. Whether the business is an event venue that is affected by a catastrophic weather event or a construction site hit by a hurricane, the policy can be designed to suit the needs of your business.

Savvy business owners understand that it isn’t just physical damage from an extreme weather event that can affect business operations. It might be a supply chain issue, such as when a vital supplier’s warehouse is affected by wildfire. Or it could be an access issue, such as when a local airport is forced to close ahead of a severe windstorm, thus negatively impacting businesses that depend on traveller spending.

With the new average for Canadian annual catastrophe claims hitting the $3 billion mark — not to mention that record-breaking $9 billion 2024 season — businesses across Canada can no longer afford to ignore planning for catastrophic weather events.

From storms in the Atlantic provinces to wildfires in the prairies to heat waves in British Columbia, no region of Canada is entirely immune to catastrophic perils. For businesses with critical revenue streams that are affected by these weather events, a single event can lead to a financial loss of varying degrees.

Even worse, insurers are pulling back from offering coverage in high-risk situations, citing profitability concerns. If they do offer a policy, it can include significant limitations and retentions. And while physical damage may be minimal in certain losses, insureds can be financially impacted by an event in numerous other ways.

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In this environment, it’s no surprise that more organizations are looking into parametric insurance, a market that’s expanded in Canada.

Experts value the Canadian market at approximately US$3.5 billion in 2024. It’s expected to reach nearly $10 billion by 2033, with many new sources of capacity entering the market.

Parametric insurance can bridge the gap with traditional risk transfer and provide the supplemental safety net that your business needs. Connect with an insurance expert to identify measurable events that can get in the way of your success and develop an insurance program designed to protect you from those specific risks.