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Insurers who issue policies covering catastrophic weather-related events should take note of New York Assembly Bill 10344. As of January 12, 2025, insurers have the ability to incorporate parametric insurance into their insurance products as a regulated area of insurance law. New York’s legislation is the most recent example of how states are recognizing parametric insurance as a reliable and valid insurance product. As climate disasters become more prevalent and increase in magnitude, policyholders may look for insurance that offers reliable payouts so as to return normalcy as quickly and efficiently as possible. Enter parametric insurance. Below is a summary of the New York legislation, why parametric insurance matters, and the different ways in which is it being used as a complement to traditional insurance products.
Key aspects of Assembly Bill 10344
Through New York Assembly Bill 10344, the New York Senate and Assembly has amended Section 1113 of the New York Insurance Law to include parametric insurance as a type of authorized insurance. “Parametric insurance” is defined as “insurance against the occurrence of a weather-related event, such as windstorm, flood, snow, wildfire, tornado, cyclone, or earthquake, where the indemnification is based on the proximity and magnitude of the event as measured and reported by a state or federal government agency.” N.Y. Ins. Law § 1113 (McKinney). It is further defined as a “basic kind of insurance” under Article 41, governing Property and Casualty Insurance Companies. N.Y. Ins. Law § 4101 (McKinney). Section 3416, entitled “Parametric Insurance,” requires an insurer, or an excess line broker if applicable, to disclose the following information in the insurance application and in a prominent writing upon policy issuance and renewal:
- the policy is not a substitute for property insurance or flood insurance, as relevant, which generally provide more comprehensive coverage in the event of a loss;
- a mortgagee or loss payee may not accept a parametric insurance policy.
N.Y. Ins. Law § 3416 (McKinney).
Parametric insurance is now a “covered policy” of insurance and falls within the definition of “personal lines insurance” under Section 3425, entitled “Certain property/casualty insurance policies; cancellation and renewal provisions; agents’ contracts and brokers’ accounts.” As the title denotes, Section 3425 sets forth regulations concerning the cancellation and renewal of certain property/casualty policies, payment or non-payments of premiums, and circumstances surrounding the contracts between insurers and its agents/brokers, several of which now apply to parametric insurance policies. For example, the “required policy period” for “personal lines insurance,” which includes parametric insurance, “means a period of three years from the date as of which a covered policy is first issued or is voluntarily renewed.” N.Y. Ins. Law § 3425(a)(7) (McKinney). The statute further provides that “[w]ith respect to personal lines insurance policies, no notice of nonrenewal or conditional renewal of a covered policy shall be issued to become effective during the required policy period unless it is based upon a ground for which the policy could have been cancelled.”
Insurers who have issued or intend to issue parametric insurance policies in New York should familiarize themselves with these regulations so that the product offered is in line with all applicable rules and regulations in the New York Insurance Law.
What is parametric insurance and why does it matter?
Parametric insurance can be understood best when compared to traditional insurance. Traditional insurance indemnifies the insured for actual losses covered by the terms and conditions of the policy. Depending on the complexity of the claims, it could take months or even years to resolve insurance coverage issues. On the other hand, parametric insurance involves pre-determined payouts following triggering events that meet or surpass conditions set by indices often provided by independent third-party sources. This results in one of its most attractive features of parametric insurance: a faster, more efficient claims process. Some examples of triggering events could include flood waters, security data breaches, power grid failures, earthquake magnitudes, hurricanes, drought/crop yield, or even pandemic infection rates. Once these conditions occur, they are measured by way of an objective index to determine if the conditions or parameters set in the policy have been met or surpassed. Once the triggering event has been established and the index parameters are met, the insurer can send payment.
Insurers offering parametric insurance may, for the time being, face some regulatory concerns as most states’ insurance laws have been written to apply to traditional indemnity insurance. However, as is seen most recently in the New York legislation, this trend may be changing.
Do the states have the authority to regulate parametric insurance?
One key issue for insurers to monitor is the federal government’s response to states’, such as New York, regulation of parametric insurance in their state insurance law. Under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the Commodity Futures Trading Commission (“CFTC”) has jurisdiction over what is known as a “swap.” The definition of a swap under the Dodd-Frank Act is quite complex and broad but generally refers to a hedge against a risk with another contract. The Dodd-Frank Act included a “safe harbor,” which exempts from federal jurisdiction insurance policies that meet the criteria of the “Product” and “Provider Test.” In general, after applying the tests, the safe harbor afforded to traditional insurance products extends only to regulated insurance which indemnify the policyholder for an actual, proven loss. This is inconsistent with parametric insurance, which is premised on more formulaic payouts following triggering events that meet or surpass pre-determined conditions. The adoption of New York Assembly Bill 10344 makes clear that parametric insurance is a regulated product and is thus arguable not a security within the jurisdiction of the CFTC. However, parametric insurance remains largely unregulated by states. Whether it be the CFTC or state insurance laws, insurers should be cognizant as to the governing authority and the associated regulations when issuing parametric insurance.
How have other states implemented parametric insurance?
One way to address the potential conflict in jurisdictional authority to regulate parametric insurance is for insurers to work with the federal government in establishing a parametric insurance product that falls within the safe harbors of the Dodd-Frank Act, such that it can be regulated as an insurance product and not a swap. This is seen in the captive insurance context in Vermont. In 2022, Vermont enacted legislation which makes clear the acceptable use of parametric insurance as a risk management tool.[1] Governor Phil Scot signed bill H.515 into law, passing specific legislation that would allow for captive insurance companies to enter into parametric risk transfer contracts. Addressing the conflict between federal and state law regarding jurisdictional oversight of parametric insurance, Deputy Commissioner David Provost of the Department of Financial Regulation stated that “[a]lthough purely parametric contracts are not considered insurance…the contract is a useful risk management tool, and there are safe harbor features that can be built into the contract to qualify it as insurance. Organizations often use captives as a central repository for all types of risk management tools, not just insurance, so it will be helpful for companies to have explicit authority for their captive to enter into parametric contracts.”[2] Kevin Mead, President of the Vermont Captive Insurance Association stated that he was “glad that we could work together to make it easier for captive companies to utilize another risk management tool.”[3]
[1] https://accd.vermont.gov/press-releases/vermont-captive-insurance-legislation-signed-law, May 31, 2022.
[2] Id.
[3] Id.
Insurance and reinsurance
United States