With climate change fuelling bigger and more costly natural disasters, interest in alternative insurance solutions is rising in Bermuda.

Parametric insurance provides rapid payout for policyholders based on predetermined thresholds such as wind velocity or rainfall, rather than damage sustained. Globally, it is expected to surge more than 12 per cent in the next decade.

“Parametrics are a deductible fill-in for many multinational companies, many of which do transactions in Bermuda,” said Milan Pavlik, head of business development, North America at SRS Altitude Re.

“The majority of those multinationals have captives and run their insurance programmes through their captives. We are seeing more inquiries from Bermuda-based insurance and reinsurance carriers who are looking to hedge.”

Mr Pavlik has also seen an increase in parametric ILS fund activity in Bermuda.

Parametrics have been a bit of a wallflower in the insurance world. In 2022, the website Instech polled parametric insurers and found that a lack of awareness of parametric insurance was one of its biggest challenges.

Thomas Keist, the chief commercial officer of SRS Altitude Re, said parametric insurance was flourishing where there were big national catastrophe exposures such as California, Florida, Japan and the Philippines.

“These are places where there is earthquake and windstorm exposure,” Mr Keist said.

He said beach hotels in hurricane-prone Florida and the Caribbean buy a lot of parametric insurance so they can get back on their feet quickly after a hurricane.

“You also have large industrial companies, who have really, really big assets in earthquake or windstorm-prone areas, and they also start to buy more and more,” he said.

Some corporate clients buy a mixture of traditional and parametric insurance, with the captive taking on the parametric reinsurance.

Mr Keist said the captive, as the buyer of parametric reinsurance, can play a more vital role in the whole transaction.

“The insured would receive from their captive an indemnity insurance and normal, traditional insurance,” he said. “For example, if they had $1 million in loss, then they would be paid that. Then the captive buys parametric reinsurance. The captive will receive a payout according to their parametric terms and provide to its group companies, indemnity-based insurance.”

Mr Keist said there was always the potential for a mismatch between what the captive had to pay out to its group members and what it got from the parametric insurance.

“If the captive is well capitalised, it can just bear that risk,” Mr Keist said. “They could become an even more vital player in the group-wide insurance programme.”