What Is Parametric Insurance?

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Parametric insurance is a type of coverage that provides a payout based on whether a predetermined event has taken place at a specified intensity and at a particular location, typically near or in your home. Parametric solutions include flood, wildfire, hail, earthquake coverage and more. Parametric policies are flexible in design and have the advantage of a quick payout without a complicated claims process. You may want to consider parametric insurance to supplement your traditional homeowners insurance if you are at risk for certain natural disasters excluded on your home policy or if you would require a quick payout. If you think you may need this additional coverage, keep reading and see if parametric insurance is right for you.

How Does Parametric Insurance Work?

Parametric insurance provides a payout when a predefined event, also known as a trigger, takes place in a specified area. For example, the payout for a hurricane parametric insurance policy may only come into effect if winds meet or exceed a stipulated amount within a certain distance from your home or property. Triggers must be objectively measurable and correspond with real losses. Keep in mind that insurance companies will likely ask you to provide proof of loss as a formality before a payout is issued. Some insurance companies only require that you tell them there has been a loss without giving them any actual evidence.

Parametric insurance differs from traditional insurance in that traditional insurance, also called indemnity insurance, offers a payout that is specifically based on the total losses from a particular peril. Typical forms of indemnity insurance include homeowners insurance, renters insurance, landlord insurance, catastrophe insurance, and so on. In other words, you only see a payout from an indemnity policy if there has been measurable damage to your insured property and in an amount commensurate to the damage. Typically, with indemnity insurance, an adjuster will need to examine said property. From there, your insurer would pay what it would cost to repair or replace the damaged property.

Parametric solutions include flood, wildfire, hail, earthquake coverage and more.

What Are the Advantages of Parametric Insurance?

Parametric insurance has several advantages including quick payouts and highly customizable policies. Unlike indemnity insurance policies, an adjuster does not have to inspect your property and determine an amount for which you will be paid based on your policy limits. Therefore, you will be paid promptly, not after a claims process, which can take months. Parametric insurance streamlines this process as the payout is based solely on whether a specific event has occurred or not. If your parametric policy pays out when a category five hurricane happens within a certain distance of your house, then you will receive your payout when a category five hurricane happens within a certain distance from your house, without the need for a claims adjuster.

Note, you will usually be asked to provide proof of loss per federal guidelines, but some insurers only require their customers to merely inform the insurance company that there has been a loss. Payouts can take only days or possibly a few weeks with parametric insurance. So, while you wait for your homeowners insurance to kick in, have comfort in knowing your parametric policy will give you a financial leg up in the meantime.

Parametric insurance is also very flexible in its design. You can dictate within your policy the amount of money paid out to you based on the severity of an event. For instance, you can specify that you will only receive 50%, 75%, or 100% of your coverage depending on the severity of a natural disaster. And keep in mind that parametric insurance can help cover the deductible associated with an indemnity policy like home insurance.

How Do Parametric Insurance and Home Insurance Differ?

Below is a breakdown of some of the differences between parametric insurance and homeowners insurance:



Payout is based on the severity of an event

Payout is based on damages caused by an event

Payouts are typically within days or weeks

Payouts can be within weeks or months

There is no deductible

Has a deductible

Can help cover deductibles for indemnity insurance

Has liability coverage

When Should You Consider Parametric Insurance?

You should consider getting parametric insurance if you need a fast payout or you can't get adequate coverage from a traditional policy.


Parametric insurance payouts are quick and simple. Payouts are dictated by whether a specific event has occurred at a particular place and at a specified intensity. This eliminates the process of having adjusters inspect the damage to your property to calculate how much money you will receive. Because of this, payouts will often take a couple of weeks if not days.

Parametric insurance offers quick payouts and highly customizable policies.

Getting adequate coverage

There are a number of reasons why someone may not be able to get an adequate amount of traditional home insurance coverage. You may not be covered by a traditional policy because:

  • Your home is located in an area with severe weather. This includes areas with hail, hurricanes, tornadoes or other windstorms.

  • Your home is located in a flood plain.

  • You live in an area with a high crime rate.

  • Your home's plumbing system, electrical system or heating is outdated. Insurance companies may see these elements as being high fire or water damage risks.

How To Get Parametric Insurance

You will need to find an insurance company that specializes in parametric insurance solutions. Getting a quote can be as easy as typing in your zip code. For instance, someone living in southern California can get parametric earthquake insurance for as low as $16 a month. There is no deductible and all you need to do is wait for a disruptive earthquake that meets the parameters listed in your policy. The insurance company will then reach out to their customers either through phone or text when a qualifying earthquake occurs. All you'll have to do is tell them you will need a payout due to the earthquake. Keep in mind some insurance providers may ask for the value of replacement for your property before giving you a quote.

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What are Parametric Insurance Products?

There are various parametric insurance products:

  • Hurricane: Typically payouts are based on the class of the hurricane. Classes are based on wind speed measured by wind monitoring systems.

  • Earthquake: Typically payouts are based on the magnitude of the earthquake. Measurements are based on the peak ground velocity.

  • Hail: Typically payouts are based on the size of the hail. Measurements range from 1.25 inches to over 2 inches.

  • Wildfire: Typically payouts are based on the number of acres burned. Insurance companies will also use past fires and satellite imagery.

  • Flight/Travel delay: Typically, payouts are based on the amount of time you're delayed. Delays include cancellations, flight/travel diversions, longer flight/travel times, etc.

  • Flood: Typically payouts are based on the severity of the flood.

Parametric insurance solutions are designed to supplement home insurance rather than replace it.

What Is Basis Risk in Parametric Insurance?

Basis risk refers to the possibility that a parametric insurance payout may not cover the total damages caused by an event. You can help mitigate the possibility of basis risk by using parametric insurance in tandem with an indemnity policy such as homeowners insurance. Homeowners insurance covers a wide array of events and has much higher limits than parametric insurance. Using both types of coverage may help you avoid any out-of-pocket expenses.

What Are Parametric Solutions?

Parametric solutions, also known as parametric insurance or parametric insurance solutions,  are a type of insurance policy that is tied to the probability of an event happening rather than providing coverage for an actual loss. A predefined trigger event is established as well as a specific and automatic payout, regardless of actual loss. Parametric insurance solutions are typically available to cover hard to insure events like natural catastrophes and are customizable. Parametric insurance solutions are designed to supplement more traditional coverage rather than replace them.

To buy it, you will need to find an insurance company that specializes in parametric insurance solutions.

Parametric Insurance FAQs

How is parametric insurance priced?

Parametric insurance uses historical data to establish a price. For example, wildfire insurance will look at the size and frequency of past fires from a local area, hurricane insurance will look at the past categories of hurricanes and probabilities in an area, hail insurance will look at the size of hailstones and frequencies from the past in a specific area, and so on.

What is parametric insurance also known as?

Parametric insurance is also known as index-based insurance or parametric solution.

What is indemnity insurance?

Indemnity insurance refers to a traditional policy that pays out a certain amount up to the policy's limit in order to cover the damages caused by an event. Common examples of indemnity insurance include your traditional homeowners, renters, or auto insurance policies.

Always Have the Coverage You Need

Parametric insurance offers coverage for a number of natural disasters. Payouts are dictated by the magnitude of an event instead of the magnitude of the losses. You should consider parametric insurance if you need a quick payout and lack coverage for specific natural disasters in your home policy. Keep in mind that parametric insurance may not be enough to cover the losses sustained from an event so it is best to also have a traditional indemnity policy such as homeowners insurance policy. Enter your zip code below and fill out a quick questionnaire to receive free home insurance quotes for the lowest rates in your area.

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