Parametric (Re)Insurance and Supply Chain Disruption: Managing Non-Owned Location Exposures

Introduction: Why Supply Chain Risk Matters More Than Ever

The resilience of supply chains has moved from a back-office concern to a boardroom priority. Recent years have shown how vulnerable global trade and production networks are to natural disasters. Flooding in Thailand disrupted semiconductor manufacturing, hurricanes shut down Gulf Coast refineries, and earthquakes affected ports and logistics hubs.

For companies, the challenge is often not direct property damage but contingent business interruption. This occurs when a key supplier, contract manufacturer, or logistics provider suffers a loss that halts your own operations. These non-owned location risks are real and growing, yet they are often overlooked or insufficiently addressed through traditional (re)insurance products.

Parametric (re)insurance solutions, if structured thoughtfully, can address these exposures with greater transparency and efficiency than traditional (re)insurance products in some cases. At LIRG, we view these solutions as part of the broader movement toward building smarter, faster, and more resilient risk transfer mechanisms for businesses, which we call Moving At The Speed Of Change™.

What is Parametric (Re)Insurance?

Parametric (re)insurance is structured around a pre-defined triggers setting the level of indemnity available for the event. For example, a hurricane reaching a specific windspeed within a defined radius or an earthquake of magnitude 7.0 or greater within a set geographic zone.

Traditional (re)insurance products typically require a demonstration of physical damage and a detailed claims adjustment process that can drag on for years. Parametric (re)insurance still indemnifies against loss, but the amount payable is tied to the occurrence of an objective event that meets the contractual parameters. The trigger determines payout thresholds; in most jurisdictions the insured still needs to demonstrate that a financial loss occurred. What makes parametric solutions different is that coverage is broader and easier to understand, without the extensive exclusions, sublimits, and complicated dependency formulas that characterize many contingent business interruption (CBI) policies and requires no physical loss, it can be purely economic.

Key advantages include:

· Simplified coverage: Instead of a long list of exclusions or narrowly defined dependencies, parametric contracts are based on a straightforward trigger and agreed payout thresholds for indemnity..

· Greater clarity: Businesses know in advance how an event will translate into recovery, reducing uncertainty.

· Operational efficiency: With fewer interpretive hurdles, claims handling is faster and more transparent than traditional approaches in most cases, which often involve forensic accounting and protracted negotiations.

How It Differs from Traditional (Re)Insurance Products

Traditional CBI coverage often requires that a covered supplier’s location suffers direct physical loss and that such damage is proven, investigated, and adjusted before claims are paid. This can take months or years, and coverage is often narrowed by exclusions, limitations, waiting periods, and dependency formulas that may not align with actual supply chain realities.

Parametric CBI structures, however, are designed to respond to the event itself and can be purely economic in nature. They still indemnify against financial loss, but payout availability is anchored to objective event data rather than a lengthy proof-of-loss process. By setting indemnity through clearly defined triggers, parametric contracts avoid many of the restrictive terms and complex claims procedures found in traditional (re)insurance products. This makes them particularly valuable for non-owned exposures:

· You may not control the supplier’s risk engineering, (re)insurance program, or reporting practices.

· Accessing reliable loss data from third parties can be difficult.

· Contractual arrangements with suppliers may not provide timely or adequate financial relief.

Parametric solutions fill this gap by combining a transparent payout framework with simplified terms, giving businesses confidence that coverage will respond when disaster strikes. Even in the absence of direct physical damage, closures and interruptions generate real financial losses that parametric structures can be designed to address.

Use Cases: Supply Chain & Non-Owned Locations

Parametric solutions are particularly well-suited for contingent exposures. Common structures include:

· Manufacturing Dependencies: A carmaker dependent on a single overseas plant for specialized parts may purchase a parametric cover tied to earthquake or typhoon intensity near that facility.

· Port & Logistics Risk: A retailer dependent on imports through a single port may structure coverage around windspeed or storm surge thresholds.

· Critical Infrastructure: Technology firms reliant on data centers or semiconductor fabs may use parametric triggers tied to regional earthquakes or floods.

Historical precedent shows the impact. According to The 2011 Thailand flood: Climate causes and return periods by Emma Louise Gale (University College London), published in Weather (Wiley, September 2013), the floods shut down large portions of the global electronics supply chain and caused at least $30 billion in economic losses.

Traditional policies often fell short for this event due to narrow wording or difficulties in proving contingent losses. Parametric covers could have provided rapid liquidity to manage disruptions for this event and many others.

Market Trends & Capital Implications

The growth of parametric solutions is supported by advances in:

· Data quality: Improved hazard modeling and satellite observation enhance trigger design.

· Reinsurance appetite: Global reinsurers and alternative capital providers, including ILS funds, increasingly view parametric covers as attractive given their transparency and low loss-adjustment expense.

· Corporate demand: Boards and CFOs are seeking risk transfer tools that provide balance sheet resilience against volatility in supply chains.

From a capital perspective, parametric structures also help reinsurers and insurers align exposures with probability of attachment and exhaustion, providing clarity in modeling and pricing.

Key Takeaways

· Non-owned location risks are often underestimated but can create significant financial losses during natural disasters even when no physical loss is present.

· Parametric (re)insurance solutions are not a cure-all, but they provide broader, clearer, and more transparent coverage than traditional (re)insurance products often, particularly where contingent exposures are difficult to quantify but inevitable.

· Market momentum is building: improvements in hazard data and (re)insurance capacity are making these solutions increasingly available and viable.

At LIRG, our perspective is clear. Parametric covers are not about replacing traditional (re)insurance products but complementing them. They allow businesses to reduce volatility, protect supply chains, and secure liquidity when it matters most. This is how we think about the future of risk transfer, Moving At The Speed Of Change™.