What is the future of parametric in the face of climate change?

Climate risk continues to dominate the market’s agenda. Temperatures keep climbing – 2024 was confirmed as the hottest year on record – and extreme weather events grow ever more severe. According to Aon, insured losses in 2024 exceeded $145bn, with Hurricane Helene ($17.5bn) and Hurricane Milton ($20bn) the most-costly.

The challenge is not abstract. As seen with the California wildfires, many homeowners were left uninsured, not through choice but due to unavailable or unaffordable cover. Climate change is already reshaping both the availability and affordability of insurance. 

Technology – a game-changer

To its credit, the market has not defaulted to withdrawal. Insurers and reinsurers remain committed to providing capacity, but they are not charities – profitability and sustainability matter. The solution lies in data: harnessing granular, high-quality insights to price risk accurately at a localised level. Done right, this enables insurers to offer cover where it is most needed, rather than retreating from risk altogether.

But data for data’s sake is no solution. Poor or incomplete data risks mispricing, misallocating capital, or wrongly abandoning portfolios that could be viable. In short, it leaves profit ‘on the table.’

Here, technology is changing the game. High-resolution satellite imagery, real-time sensor networks, and AI-driven probabilistic models are shifting the market from reactive to predictive underwriting. For example, cyclone landfall probability models in the Pacific now give cedants days of lead time for portfolio stress-testing – a capability unimaginable just a decade ago.

Is parametric the answer?

Against this backdrop, parametric insurance is gaining traction. Its appeal lies in simplicity: pay-outs are triggered automatically when pre-defined thresholds – such as rainfall, wind speed, or earthquake magnitude – are met. No loss adjuster, no delay. Funds flow within days, providing critical liquidity for businesses and governments in the immediate aftermath of disaster.

Parametrics also complement traditional reinsurance treaties, particularly for climate-driven perils where speed and liquidity are essential. Reinsurers are increasingly active in this space – not only as capacity providers, but also as structuring innovators, supporting sovereign risk pools in regions such as the Caribbean, Asia, and Africa. Done well, parametric can smooth portfolio volatility and broaden access to protection.

Yet challenges remain. Triggers may not be met even when losses occur, leaving insureds exposed. The accuracy of pay outs depends on the integrity of underlying data. And price remains contentious – many cedants view parametric covers as costly relative to traditional treaty capacity, while reinsurers remain cautious about scaling up until adoption broadens.

Is the market ready?

What is clear is that climate risk is here to stay. The frequency and severity of recent events prove that unpredictability is now the predictable. Insurers and reinsurers must not only grapple with underwriting risk, but also with reputational and political pressures as societies demand protection.

The winners will be those who leverage data effectively, innovate boldly, and balance risk appetite with the market’s need for capacity, with predictable parametric solutions.

The open question for Monte Carlo RVS 2025 is this: will this be the year parametric cover cements its role as a core blended adjunct to traditional treaty solutions – or will adoption remain piecemeal?