Parametric insurance reaches ‘tipping point’, accelerated by climate change

Thomas Keist, chief commercial officer at SRS Altitude, believes the growth of parametric insurance will be driven by the increasing impact of climate change. 

Parametric insurance — once a niche element of alternative risk transfer — is now steadily gaining traction, as growing climate risks drive both supply and demand for the product.

Speaking exclusively to Intelligent Insurer, Thomas Keist, chief commercial officer at SRS Altitude, said the market has now reached a significant “tipping point”.

“The topic of parametrics is hot because it has now achieved critical mass in terms of both supply and demand,” Keist said.

While its rise reflects innovation within the insurance sector, Keist is clear that much of the momentum behind parametric solutions is directly tied to escalating climate-related risks.

“It’s sad, but the growth of parametric insurance will be “fuelled” by climate change,” he said. “The majority of events covered are natural catastrophes, and with those increasing, so will demand for this product.”

As climate volatility grows, parametric covers offer one key advantage: faster, pre-agreed payouts based on trigger events, rather than lengthy claims adjustments — making them increasingly attractive for businesses and governments seeking financial resilience amid intensifying natural disasters.

Commoditisation pros and cons

When asked about the increasing commoditisation of parametric insurance, Keist offered a balanced perspective, emphasising both its advantages and potential drawbacks.

“By having more commoditised products, there will be more competition from the supplier side, which essentially means prices become more competitive for buyers,” he explained. 

Additionally, he highlighted how commoditisation enhances accessibility, making these solutions more understandable and easier to integrate for smaller businesses. However, he was quick to point out the risks tied to this trend.

“As a rule, the basis risk increases with commoditisation,” he stated, referring to the gap between the actual loss and the payout triggered by a parametric policy.,

Cautioning in addition that price volatility could surge in such markets, Keist added: “There will be times when prices are very low, offering a lot of value for money. But when events trigger these insurances, prices could shoot up and volatility will also be much higher.”

For him, the tailored side of the spectrum is where re/insurers can provide real value to their clients.

“We see our value proposition in not simply commoditising, but tailoring the product, which allows us to establish more certainty around the insurance outcome, both in terms of price and basis risk.”

“Our value proposition is not simply commoditising, but tailoring the product, which allows us to establish more certainty around the insurance outcome.”

Efficiency gains

The efficiency of parametric insurance stood out as a key theme in the discussion, and Keist described it as the space with “the biggest potential for efficiency gains” for insurance.

“As we are able to standardise different modules to create tailored solutions, parametric insurance is perfectly placed to be supported by artificial intelligence and automation processes,” he said. 

Whether applied to claims payments or automated quotations, the capacity for streamlining operations with parametric insurance is unmatched.

Keist also elaborated on how this insurance can democratise risk transfer. 

“It is completely agnostic of the underlying risk,” he emphasised, explaining how this unique quality made it accessible to underserved and emerging markets, where traditional insurance may falter due to a lack of capacity or cumbersome claims processes. 

“It doesn’t matter where the buyer is or what their risk profile looks like; the focus is solely on the covered event, such as a windstorm or earthquake and its intensity.”

This ability to transcend geographical and operational boundaries makes parametric insurance a potent tool for addressing gaps in global insurance markets, and Keist is very optimistic.

“It has strong potential to be democratised – not just by business size but also geographically,” he predicted.

Tradability potential

Another innovative prospect for parametric insurance lies in its potential for tradability, and while this remains an aspiration, Keist painted an intriguing picture of how the model could evolve.

“Currently, parametric insurance is mostly provided as an insurance policy but it could also take the form of a derivative – a security that can be traded on stock exchanges,” he explained. 

The defining factors of parametric insurance open the door to transforming insurance policies into a marketable asset, potentially unlocking vast capital market resources. 

SRS Altitude aims to be at the forefront of shaping this bright yet challenging future, and Keist concluded with an optimistic outlook: “The future holds many interesting developments, and we continue contributing to this market.”

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