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The role of parametric insurance in capital management

ReutersJul 2, 2025 12:39 PM

By Henry Gale

- HOLD FOR PARAMETRIC INSURER ISSUE 10 (THURS 3 JULY)

PDF HEADLINE: Speaking capital's language

ONLINE HEADLINE: The role of parametric insurance in capital management

(The Insurer) - The organisations purchasing parametric coverage at the greatest scale use it not just as a risk transfer product, but also as a capital management tool.

When a sudden disruption hits, whether a natural disaster, weather, supply chain or other event, organisations may face soaring costs or plummeting revenue immediately. To manage cashflow, they may consider cutting other expenses or raising new capital through debt or equity.

Parametric risk transfer is another option for organisations to access the liquidity they need to respond to shocks. Unlike traditional insurance, payouts are made quickly and can be used flexibly.

This is the appeal of parametric for some of its largest buyers, from corporations to governments. The purchase decision goes beyond allocations in an insurance budget: parametric covers are weighed up alongside other sources of capital instead.

A capital management approach is also encouraging humanitarian organisations to adopt parametric risk transfer for disaster financing at greater scale. Our lead article this month considers how agencies are seeing parametric solutions as financial leverage, allowing squeezed budgets to go further.

One challenge is that the insurance industry can sometimes speak a different language to those familiar with other financial instruments. For parametric insurance to be used as a capital management tool, decision-makers need to clearly understand its value proposition and how it compares to and complements other tools.

A lack of mutual understanding has held back collaboration between insurers and lenders, according to a recent report from Marsh McLennan, the Insurance Development Forum and the French Development Agency that focuses on development finance.

Where the parametric market can increase its understanding of the products and terminology of lending and other financial sectors, it may uncover more opportunities to deploy parametric solutions, whether in combination with other instruments or as an alternative.

Disclaimer: The information provided on this website is for educational and informational purposes only and should not be considered financial or investment advice.

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