California’s recent traumatic spate of wildfires has spotlighted the often clunky process of traditional commercial insurance.
Typically, businesses are required to document their losses, file a claim, and wait months or even years for reimbursement. Insurance companies must meticulously assess damages, verify that a claim was not excluded from the policy, and determine how much to pay. Midsize companies and multifamily property owners can go bankrupt waiting for reimbursement.
Some businesses are choosing another option that promises to get them help faster: parametric policies. Allied Market Research forecasts that the global parametric insurance market, which totaled $18 billion in 2023, will grow to more than $34 billion by 2033.
Parametric insurance has been around for years, covering catastrophes like tropical cyclones, other weather-related events, and earthquakes. These policies’ main advantage is a faster payout, since the insurer agrees to pay a predefined sum when a specific peril reaches a predefined magnitude. Payment is triggered by parameters that can be measured quickly, such as rainfall, hurricane category, or wind speed.
The insurer knows how much the insurance subscriber will pay, and the subscriber understands the amount of coverage it will get. Both are aware of the conditions necessary to green-light the payment.
Parametric policies are expensive: A $1 million wildfire insurance policy could require $50,000 in annual premium payments. But the increased frequency of natural disasters
is emphasizing the need for faster procedures. Ten years ago, wildfires were considered secondary perils and not regarded as existential threats. The 2016 Fort McMurray fire in Alberta, Canada, changed that attitude within the insurance industry: The fire caused $3 billion in losses, which at that time was considered enormous.
Since then, wildfire costs in the US have multiplied, totaling $67 billion in insured losses in 2024, not counting the 2025 fires, according to reinsurer Munich Re.