Category: Parametric insurance · Reviewed by Taylor Watts, Broker · New Business · Last reviewed 2026-06-10
Parametric insurance is a class of insurance contract under which the insurer’s obligation to pay is triggered by the occurrence of a defined, objectively measurable event (a “parameter” or “index”) rather than by an indemnity assessment of the policyholder’s loss. This entry expands on the earlier wiki article at /wiki/parametric-insurance/ (Batch 7) and focuses on developments since the publication of the EIOPA Discussion Paper on parametric insurance in June 2023.
Category: Parametric insurance Also known as: Parametric cover, index insurance, trigger-based insurance Established / Coined: Modern use from the late 1990s (CAT bonds and weather derivatives); accelerated growth from 2018; EIOPA Discussion Paper 2023 Related concepts: Parametric insurance (batch 7), Trigger event parametric, Basis risk parametric, Parametric capacity
A parametric insurance contract pays a pre-agreed sum (or sum calculated by a pre-agreed formula) on the occurrence of a defined trigger event, typically measured by an independent third-party data source. The classical English insurance definition in Prudential Insurance Co v Inland Revenue Commissioners [1904] 2 KB 658 — a contract under which one party pays a sum on the happening of an uncertain event in which the other has an interest — is satisfied provided the insured has an insurable interest in the loss against which the cover is structured (Marine Insurance Act 1906 s.4; Life Assurance Act 1774 s.1).
The structural feature that distinguishes parametric from traditional indemnity insurance is the absence of a loss adjustment process: payment is owed if the parameter is met, irrespective of the actual loss suffered, and is not owed if the parameter is not met, even where actual loss has occurred. This is the source of basis risk, the principal commercial issue with the form.
The central United Kingdom legal question is whether a particular parametric contract constitutes insurance (a regulated activity under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, SI 2001/544, articles 3 and 10) or a derivative (article 83). The classical insurance test in Department of Trade and Industry v St Christopher Motorists’ Association [1974] 1 WLR 99 requires: a contract; consideration; payment on an uncertain event; in which the insured has an interest; with risk transfer. Provided insurable interest is present, parametric contracts are insurance for regulatory purposes. Where insurable interest is absent the contract is a derivative subject to Part IV of the RAO and to MiFID II conduct rules.
The European Insurance and Occupational Pensions Authority published a Discussion Paper on parametric insurance in June 2023, setting out a taxonomy and supervisory expectations on basis risk disclosure, consumer testing, and the boundary with derivatives. Prudential Regulation Authority Supervisory Statement SS5/16 on Solvency II internal models addresses the treatment of non-indemnity covers in capital modelling. Conduct expectations under ICOBS 6, ICOBS 8 and the Consumer Duty (FCA PS22/9) apply where parametric products are sold to UK retail customers.
Post-2023, the parametric market in London has grown materially. Lloyd’s Lab cohorts from cohort 7 (2022) onwards have hosted parametric MGAs including Skyline Partners, FloodFlash, Descartes Underwriting and Arbol, several of which have progressed to syndicate-in-a-box or coverholder status with Lloyd’s managing agents. The Lloyd’s Product Innovation Facility (LPIF) has supported parametric capacity since 2022. London market MGA activity covers earthquake, named windstorm, flood, hail, heat, solar irradiance shortfall, wind speed shortfall and bespoke event triggers.
The FCA Innovation Hub and Regulatory Sandbox have engaged with parametric propositions through cohorts 8 (2022) and 9 (2023), focusing on retail-facing parametric flood and storm products and on Consumer Duty fair-value assessment for non-indemnity payouts.
Variations include single-trigger contracts (one parameter, e.g. peak ground acceleration), multi-trigger contracts (cat-in-a-box plus magnitude), cascade triggers (parametric first-loss with indemnity drop-down) and modelled-loss covers (insurer payout based on a third-party model run on event data). Hybrid parametric-indemnity products mitigate basis risk by paying a parametric quantum with a top-up indemnity layer.
A UK manufacturer with a Japanese subsidiary purchases a parametric earthquake contract from a London MGA, written on a Lloyd’s syndicate. The trigger is peak ground acceleration above 200 cm/s² recorded by the nearest Japan Meteorological Agency seismometer to the insured site. The contract pays GBP 5 million on trigger, settled within 21 days. The broker’s demands-and-needs statement under ICOBS 5 explicitly records the residual basis risk and the policyholder’s acceptance, and the product is governed under PROD 4 with annual fair-value review.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-10. Next review: 2026-12-10.
Apex Insurance Brokers Limited. Authorised and regulated by the Financial Conduct Authority, FRN 724952. Registered in England and Wales, Companies House 07014570. This entry provides general information about UK insurance concepts and is not regulated advice. Consult your insurance broker on your specific position.
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