How Is Parametric Insurance Treated for Accounting Purposes: Insurance or Derivative?

In Brief:

• Parametric insurance pays when a predefined trigger occurs (e.g., wind speed, rainfall, earthquake magnitude), not based on the actual amount of loss.
• It uses objective third-party data, enabling transparent triggers and faster payouts with minimal claims adjustment.
• It typically complements traditional insurance, helping cover gaps like high deductibles or limited coverage.
• Accounting treatment depends on contract structure: if it requires insurable interest and proof of loss, it generally falls under ASC 944.
• If it can pay without economic loss, it may be treated as a derivative under ASC 815, with fair value accounting.

During the Annual California, Hawaii, and Nevada All Industry Day hosted on October 23, 2025, by the CPCU chapters from these states, attendees had the opportunity to participate in an engaging presentation on the Impact of Insurtechs. One of the less commonly used terms mentioned during the session was parametric insurance. This article aims to explain what parametric insurance is and explore whether it presents any challenges from an accounting perspective.

What is it?

A parametric insurance policy provides coverage based on the probability of a predefined event occurring, rather than the actual amount of loss sustained. The insured event is defined by a specific parameter or threshold, and when that threshold is reached or exceeded, a payout is automatically triggered under the policy.

The underlying indexes used in these policies can take various forms — the most common being weather-related (e.g., wind speed, rainfall, or snowfall) and geophysical (e.g., earthquake magnitude or flood depth). What these indexes share is their objectivity and transparency, as they are typically derived from data reported by independent third-party sources and can be reliably modeled. Importantly, the index must be closely correlated with the underlying hazard it is intended to represent.

Rather than serving as a substitute for traditional insurance, parametric insurance complements it. For example, as mentioned during the presentation on the Impact of Insurtechs, a commercial property owner in Texas with a conventional hail insurance policy may face significant deductibles. To mitigate that exposure, the owner could purchase a parametric hail insurance policy, which provides a payout when hail of a specified size is recorded near the property, helping to cover or reduce the deductible burden of a traditional policy.

The policy relies on verified hail size data obtained from a trusted source, such as the National Weather Service. It establishes a specific index threshold that, once met, triggers a predetermined payout. A key advantage of parametric insurance is that it involves minimal or no loss adjustment costs, as the payout is made automatically once the data confirms the triggering event without lengthy adjusting, regardless of the actual repair costs incurred.

Although the example above involves property damage, parametric insurance can also be applied to losses that do not involve physical assets, such as flight delays or event cancellations.

Accounting for Parametric Insurance: An Insurer’s Perspective

Despite the payout being mainly triggered by reaching or exceeding a set index, parametric insurance policies typically also require a proof of loss. Depending on the state regulation, the proof can be as simple as photos and do not require a lengthy loss adjustment process. Along with the verified insurable interest, such policy would be considered insurance by regulators and would follow the accounting treatment just like an insurance contract in accordance with ASC 944 – Financial Services – Insurance.

But what if the insurance company did not require actual proof of loss? What if the policy was structured in such a way that would allow for the index threshold to be triggered yet the insured did not sustain any economic loss? These circumstances would not meet the definition of an insurance contract and would need to be accounted for similar to derivatives that hedge against financial volatility. These cases are rare and are treated in accordance with ASC 815 – Derivatives and Hedging,  which require recording the contract at fair value and recognize changes in fair value in current-period earnings.

Regulatory Perspective

The regulatory landscape for parametric insurance continues to evolve. Just a few years ago, parametric products fell under a broad federal definition of a swap, and most states did not regulate them as insurance. Recently, however, New York enacted legislation (Assembly Bill A10344) authorizing parametric insurance to be marketed on an excess and surplus lines basis effective January 2025.

It is also worth noting that when New York regulators approve a new insurance product or framework, their decisions have historically carried significant influence nationwide, often paving the way for other states to follow suit.

Conclusion

As natural catastrophe losses continue to rise, the traditional insurance market has hardened, making coverage more difficult to obtain and often requiring innovative approaches. Parametric insurance offers one such alternative risk solution. Although some might characterize the binary nature of parametric triggers as a heavier form of ‘gambling’, akin to rolling dice on whether a threshold is met, the reality is that these products operate on transparent, pre-agreed metrics. In that sense, they share a conceptual similarity with reinsurance in how risk is transferred, while still remaining fundamentally distinct from traditional reinsurance structures. While the concept isn’t new, it has historically been used primarily by major global carriers and brokers.

We’re Here to Help

If you have any questions about the appropriate accounting treatment for your specific insurance product., we can help. Contact your JLK Rosenberger team member, or click here to contact us. We look forward to speaking with you soon.