On Dec. 13, 2024, New York Governor Kathy Hochul signed a bill integrating parametric insurance into the state’s existing legal framework for insurance products under the New York Insurance Law (“NYIL”). Assembly Bill A10344 defines parametric insurance and establishes the disclosure and licensing requirements when selling such products. New York joins only a handful of states that have taken active steps to define and regulate parametric insurance, further expanding its availability in the U.S. While the new law will be warmly embraced by a U.S. property and casualty market in need of greater capacity for weather-related events, it does not directly address parametric insurance’s promise to eliminate a great deal of the costly friction that is part and parcel of traditional, indemnity-based insurance by paying insureds (and cedents) for modeled-correlated loss, not adjusted and verified loss. Instead, consumers are merely to be warned that parametric products are not meant to replace but only supplement traditional insurance products. The new law does not squarely address the issue of parametric insurance’s relationship with the principle of indemnity. New York is seemingly and perhaps wisely leaving the industry – insurers, reinsurers, brokers, accountants, parametric vendors, and their attorneys – to fashion means for making parametric products compliant with the NYIL and acceptable to the New York Department of Financial Services (“NYDFS”).
What Is Parametric Insurance?
Parametric insurance offers a unique way to address financial losses from climate-related events, such as floods, hurricanes, earthquakes, wildfires, or other natural disasters. Unlike traditional insurance policies or reinsurance contracts that rely on adjusting claims for the purpose of accurately indemnifying insureds (and cedents) for actual loss, parametric insurance payouts are triggered upon pre-determined criteria (e.g., wind speed, water levels, Richter scale), which only correlate with presumed or probable loss. These criteria are often tied to objective data, such as the proximity or intensity of a weather event, and are verified by reported government data. Consequently, parametric insurance promises to eliminate a great deal of friction in insurance and reinsurance transactions, including adjusting claims and litigating issues of coverage. Under a parametric product, the policy trigger and loss are both objectively measured based on pre-determined criteria. Conversely, an insured might sustain a loss that is not identified or measured by the parametric criteria. While artificial intelligence, increasingly accurate weather data measurement, and improvements in modeling of loss under parametric products is rapidly closing the gap between actual and correlated loss, they are not coterminous.
Key Provisions of the New Law
The new parametric law is brief and contains three key provisions:
- Define parametric insurance, inserting it into the statutory list of authorized types of insurance in New York
- Establish disclosure requirements in parametric insurance policy applications
- Update existing broker licensing authority to include parametric insurance.
Parametric’s Potential Conflict With Federal Law
In 2010, the Dodd-Frank Act’s statutory definition of a financial “swap” unintentionally created the possibility of the federal government regulating certain insurance products. In 2012, the Commodity Futures Trading Commission adopted a “safe harbor” for qualifying insurance products, exempting them from Dodd-Frank’s broad swap definition as well as federal jurisdiction. The safe harbor, drawing on the principle of indemnity, requires that qualifying insurance products only pay upon proof of loss and that the payment be limited to the value of the insured’s interest. The safe harbor similarly requires that reinsurers only indemnify a cedent up to the amount the cedent pays its insured. The New York definition of parametric insurance does not require proof of loss or place limitations on payment, although the NYDFS might. The safe harbor is, however, non-exclusive, meaning that a product not clearly falling within its reach – such as those products complying with the New York definition of parametric – is not presumed to be a swap without further analysis.
Why New York’s Parametric Law Matters
New York’s parametric law is a significant milestone in the adoption of a product that could fundamentally transform the insurance industry. Litigation and claims adjusting consume on average 10-20 percent of every insurance dollar. The elimination of this costly friction by parametric insurance, on a broad scale, could have a dramatic impact on the insurance industry. By defining parametric insurance and regulating it under the NYIL, New York is leading the way for its adoption nationwide. Consumers can rely on the NYDFS to ensure parametric policies will only be sold by licensed professionals and suitably rated insurance carriers. However, the new parametric law, while brief, is not necessarily permissive. NYDFS will undoubtedly make determinations about parametric products on a case-by-case basis. As the Insurtech community brings new insurance and reinsurance parametric products to market, it will need to satisfy the NYDFS that any parametric product is beneficial to the consumer and increases the solvency and stability of the insurance industry as a whole. The definition of indemnity in the parametric context will eventually need to be addressed and refined in the coming months, perhaps, years.
