Insurance is one<\/span> of the few industries that have remained largely unchanged over the past few decades at a low level: You suffer losses as a direct result of something going south, and you get paid by your insurer.<\/p>\n

But that old model doesn\u2019t always work. For example, a construction company in a region regularly affected by hurricanes might see its projects surviving these storms mostly unscathed, but it might still see losses in terms of time and other potential costs because crews simply couldn\u2019t make it to work.<\/p>\n

Your traditional indemnity policy might pay this company based on the magnitude of its losses but wouldn\u2019t have to pay for those unforeseen, follow-on costs because they aren\u2019t \u201cdamages\u201d in the usual sense. One could argue the company is getting the short end of the stick here.<\/p>\n

Parametric insurance, on the other hand, ensures that everyone can win. Instead of insuring customers based on the magnitude of the losses incurred, parametric contracts insure customers against the magnitude of events. So in our example, the construction company may see a payout if there is a certain \u201ctrigger event,\u201d such as the area is hit by a Category 4 hurricane or higher, or if the wind speed reaches a certain, pre-specified mark.<\/p>\n