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Parametric Insurance

Parametric Insurance

Definition

An agreement under which an entity assuming risk (the "insurer") agrees to pay the indemnitee (the "insured") an agreed amount upon the occurrence of a specified event, such as an earthquake or hurricane of specified intensity. The event, or "parameter," is often indicated by an established and authoritative index for that type of event, such as the Richter scale for earthquake intensity or the Saffir-Simpson scale for hurricanes. For that reason, parametric coverage is also referred to as "index-based insurance." Parameters can be defined by other objective factors, such as the extent of physical damage, and are typically limited to certain time periods and geographic areas. The parties may also develop customized risk parameters based on wind speeds, storm surge, rainfall (or lack thereof), and other factors, both natural and human-driven, alone or in combination.

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