Using Parametric Insurance to Close the Earthquake Protection Gap

Using Parametric Insurance to Close the Earthquake Protection Gap
Parametric Insurance

04 of 05

This insight is part 04 of 05 in this Collection.

Property Risk Management

08 of 08

This insight is part 08 of 08 in this Collection.

December 11, 2023 6 mins

Using Parametric Insurance to Close the Earthquake Protection Gap

gettyimages_176623210_rt.jpg

Parametric solutions have the flexibility to make hard-to-predict and often uninsurable “grey swan” events insurable. Such is the case for earthquakes — a potentially catastrophic risk across the globe.

Key Takeaways
  1. There is a growing protection gap for grey swan risks — including earthquakes — in traditional risk transfer markets.
  2. Businesses often struggle to quantify total economic cost and are therefore retaining risk, leading to high uninsured losses.
  3. Parametric cover — which is triggered by third-party event data rather than physical damage to an owned asset— provides broad and flexible event response to help offset uninsured losses.

Natural catastrophes are growing in frequency and severity across the globe, upending lives, businesses and infrastructure — and they are helping grow a protection gap that is leaving most disaster losses uninsured.1

According to Aon's 2023 Weather, Climate and Catastrophe Insight report, natural disasters caused global economic losses of $313 billion in 2022, outstripping economic growth. Insured losses lagged behind, accounting for just $132 billion. That’s a 58 percent gap, or $181 billion in uninsured losses.

This protection gap has continued to grow, along with uncertainty created by conventional risk transfer solutions as insurers grapple with runaway loss costs. Parametric insurance provides a response by insuring otherwise uninsurable “grey swans” with difficult-to-quantify economic impact.

Better Informed

The Challenges of Insuring Earthquake Risks

Catastrophic earthquake probability can be calculated, but the ensuing economic impact is difficult to measure. Unable to attach capital to transfer such risks, businesses often end up simply retaining them — with potentially devastating consequences.

This creates a “grey swan risk transfer paradox.” Events like catastrophic earthquakes are exactly why businesses should transfer risk. However, if there is insufficient data from an underwriting perspective, it can make sufficient risk transfer unavailable — and therein lies the paradox.

Without an action plan to close this growing protection gap in traditional markets, losses will likely continue to mount in a world of increasing extremes, as global trends indicate.

Though a catastrophic earthquake can be perceived as a low probability event, over a long time, horizon expectations of losses should be quite substantial. The last major earthquake in California was the Northridge earthquake in 1994. Over the next 30 years, the United States Geological Survey places the probability of a 6.7 quake (or higher) at 60 percent in Los Angeles and 72 percent in San Francisco.1 In fact, such hazards exist through the entire U.S. West Coast, as well as in Alaska, the Midwest (New Madrid Fault), and South Carolina.

Estimating the potential loss exposure from an earthquake also presents various challenges. Common complexities include:

  • Limited preparation opportunities

    Unlike relatively frequent tropical cyclones, catastrophic earthquakes offer little warning, and their frequency is uncertain. This also limits potential efficacy of catastrophe modeling given limited opportunities to test and refine models.

  • Interconnected risks

    In addition to affected premises and infrastructure damage, the impact of earthquakes can ripple out beyond businesses to stakeholders, such as supply chains, workforce and lenders.

  • Non-physical losses

    Beyond property damage, losses may include difficult to model non-damage business interruption, loss of attraction, and loss of ingress/egress — the inability to enter or leave the affected premises.

  • Uncertainty over the traditional claims process duration

    A major earthquake should be expected to put a strain on claim adjusters, extending the claim process that ties up capital relief.

“Many of our clients have found that even if their own construction quality is outstanding and direct physical exposure to catastrophic events limited, it doesn’t mean their business is not highly exposed,” says Pete Lacovara, managing director in Aon’s Alternative Risk Transfer and Innovation practice in North America “This includes employees who are adversely impacted by local infrastructure, making it difficult to work from home. Even if the office is not damaged, the workforce may not be able to use it.”

Better Decisions

Parametric: A Compelling Solution for Unexpected Catastrophes

Known unknowns like grey swan earthquakes are where parametric solutions shine. Unlike traditional insurance, the trigger for parametric cover comprises predetermined third-party parameters — such as an earthquake of a particular magnitude within a set geography — rather than physical loss to an owned asset as with conventional cover.

Instead of struggling to quantify the economic impact, parametric providers can objectively assess the risk at any given geography and attach capital to that risk to offset uninsured losses. Advancements in data and analytics have allowed clients to obtain cover for more perils with greater precision than ever before.

In catastrophe-prone areas where traditional insurance capacity is restricted, the broad coverage offered through parametric insurance is a particularly compelling fit. Parametric solutions are:

  • Independent

    Triggering parameters are measured and reported by a third party. Risk managers can clearly define events that will and will not result in paid claims, as well as the sum of those claims.

  • Fast

    Because there is a clear event trigger, claim settlement is quicker and more transparent. Coverage is usually confirmed within days and funds arrive within weeks — avoiding a complex loss adjustment process.

  • Flexible

    Any financial loss ensuing from a triggering event can be an indemnifiable expense under parametric insurance.

$181B

Uninsured global nat cat losses in 2022

Source: 2023 Weather, Climate and Catastrophe Insight

Learn More
Quote icon

Every entity exposed to natural catastrophe should have parametric solutions in their risk capital stack, because all risk has a grey swan component.”

Michael Gruetzmacher
Head of Alternative Risk Transfer, North America
Bringing Traditional and Parametric Insurance Together to Close the Gap

With a parametric trigger, uninsurable exposures become more insurable. These solutions are an ideal complement to traditional property insurance. They provide capital for a wide variety of interconnected exposures, such as impacted suppliers, employees, and other stakeholders.

"With earthquakes, you have limited opportunity to prepare your business or employees,” says Lacovara. “There is very low insurance penetration for earthquakes on the West Coast for personal lines. Even if a company is buying traditional indemnity earthquake cover, it’s not guaranteed that their employees are. Maybe your buildings are fine, but your employees find themselves without a home. A parametric solution’s flexibility works well in these situations.”

Further, parametric insurance does not pose the same capacity challenges as traditional insurance, making it ideal for businesses that are unable to secure traditional cover. In a market where achieving meaningful contingent business interruption limits can be difficult, parametric cover provides additional limits for peak catastrophe risks.

Aon’s Thought Leaders
  • Michael Gruetzmacher
    Head of Alternative Risk Transfer, North America
  • Peter Lacovara
    Managing Director, Alternative Risk Transfer and Innovation, North America
  • Colin Harper
    Managing Director for Alternative Risk Transfer and Innovation, North America
  • Kirstin McMullan
    Principal Consultant, Natural Catastrophe, Australia
  • David Gierski
    Property Broking Director, Europe, Middle East, Africa
  • Aurelien Schwachtgen
    Director, Client Solutions, Aon Global Risk Consulting, Europe, Middle East, Africa

1 2023 Weather, Climate and Catastrophe Insight | Aon

General Disclaimer

The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Terms of Use

The contents herein may not be reproduced, reused, reprinted or redistributed without the expressed written consent of Aon, unless otherwise authorized by Aon. To use information contained herein, please write to our team.

Aon's Better Being Podcast

Our Better Being podcast series, hosted by Aon Chief Wellbeing Officer Rachel Fellowes, explores wellbeing strategies and resilience. This season we cover human sustainability, kindness in the workplace, how to measure wellbeing, managing grief and more.

Aon Insights Series Asia

Expert Views on Today's Risk Capital and Human Capital Issues

Aon Insights Series Pacific

Expert Views on Today's Risk Capital and Human Capital Issues

Aon Insights Series UK

Expert Views on Today's Risk Capital and Human Capital Issues

Client Trends 2025

Better Decisions Across Interconnected Risk and People Issues.

Construction and Infrastructure

The construction industry is under pressure from interconnected risks and notable macroeconomic developments. Learn how your organization can benefit from construction insurance and risk management.

Cyber Resilience

Our Cyber Resilience collection gives you access to Aon’s latest insights on the evolving landscape of cyber threats and risk mitigation measures. Reach out to our experts to discuss how to make the right decisions to strengthen your organization’s cyber resilience.

Employee Wellbeing

Our Employee Wellbeing collection gives you access to the latest insights from Aon's human capital team. You can also reach out to the team at any time for assistance with your employee wellbeing needs.

Environmental, Social and Governance Insights

Explore Aon's latest environmental social and governance (ESG) insights.

Q4 2023 Global Insurance Market Insights

Our Global Insurance Market Insights highlight insurance market trends across pricing, capacity, underwriting, limits, deductibles and coverages.

Global Risk Management Survey

Better Decisions Across Interconnected Risk and People Issues.

Regional Results

How do the top risks on business leaders’ minds differ by region and how can these risks be mitigated? Explore the regional results to learn more.

Top 10 Global Risks

Trade, technology, weather and workforce stability are the central forces in today’s risk landscape.

Industry Insights

These industry-specific articles explore the top risks, their underlying drivers and the actions leaders are taking to build resilience.

Human Capital Analytics

Our Human Capital Analytics collection gives you access to the latest insights from Aon's human capital team. Contact us to learn how Aon’s analytics capabilities helps organizations make better workforce decisions.

Human Capital Quarterly Insights Briefs

Read our collection of human capital articles that explore in depth hot topics for HR and risk professionals, including using data and analytics to measure total rewards programs, how HR and finance can better partner and the impact AI will have on the workforce.

Insights for HR

Explore our hand-picked insights for human resources professionals.

Workforce

Our Workforce Collection provides access to the latest insights from Aon’s Human Capital team on topics ranging from health and benefits, retirement and talent practices. You can reach out to our team at any time to learn how we can help address emerging workforce challenges.

Mergers and Acquisitions

Our Mergers and Acquisitions (M&A) collection gives you access to the latest insights from Aon's thought leaders to help dealmakers make better decisions. Explore our latest insights and reach out to the team at any time for assistance with transaction challenges and opportunities.

Natural Resources and Energy Transition

The challenges in adopting renewable energy are changing with technological advancements, increasing market competition and numerous financial support mechanisms. Learn how your organization can benefit from our renewables solutions. 

Navigating Volatility

How do businesses navigate their way through new forms of volatility and make decisions that protect and grow their organizations?

Parametric Insurance

Our Parametric Insurance Collection provides ways your organization can benefit from this simple, straightforward and fast-paying risk transfer solution. Reach out to learn how we can help you make better decisions to manage your catastrophe exposures and near-term volatility.

Pay Transparency and Equity

Our Pay Transparency and Equity collection gives you access to the latest insights from Aon's human capital team on topics ranging from pay equity to diversity, equity and inclusion. Contact us to learn how we can help your organization address these issues.

Property Risk Management

Forecasters are predicting an extremely active 2024 Atlantic hurricane season. Take measures to build resilience to mitigate risk for hurricane-prone properties.

Technology

Our Technology Collection provides access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities of technology. Reach out to the team to learn how we can help you use technology to make better decisions for the future.

Trade

Our Trade Collection gives you access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities for international business. Reach out to our team to understand how to make better decisions around macro trends and why they matter to businesses.

Transaction Solutions Global Claims Study

Better Decisions Across Interconnected Risk and People Issues.

Weather

With a changing climate, organizations in all sectors will need to protect their people and physical assets, reduce their carbon footprint, and invest in new solutions to thrive. Our Weather Collection provides you with critical insights to be prepared.

Workforce Resilience

Our Workforce Resilience collection gives you access to the latest insights from Aon's Human Capital team. You can reach out to the team at any time for questions about how we can assess gaps and help build a more resilience workforce.

More Like This

View All
  • 2026 Human Capital Outlook: 5 Forces to Act on

    Article 28 mins

    2026 Human Capital Outlook: 5 Forces to Act on

    As workforce expectations rise and business risks intensify, HR leaders must act on five forces shaping 2026 — from AI and skills to healthcare costs, analytics, pay transparency and retirement readiness. Discover how to build a strategy that balances performance, cost and experience.

  • From Compliance to Competitiveness: Sustainability for Finance Leaders

    Article 10 mins

    From Compliance to Competitiveness: Sustainability for Finance Leaders

    Sustainability is no longer reputational. It’s a strategic priority within risk and capital management, powered by robust data, innovation and industry expertise. For finance leaders, embedding sustainability into decision making can be critical to secure long-term value and earn stakeholder trust.

  • Nuclear Energy Revival: Risk, Resilience and the Talent Revolution

    Article 15 mins

    Nuclear Energy Revival: Risk, Resilience and the Talent Revolution

    Nuclear is a critical pillar of the energy transition, addressing the dual challenges of decarbonization and surging demand. Success will hinge on managing risks across new generation technologies, regulatory shifts, financial model changes, supply chain challenges — and the acute war for talent.

  • Nordic Insurance Market Insights – November 2025

    Article 14 mins

    Nordic Insurance Market Insights - 2026 Outlook

    The insurance market is softening across the Nordics; a trend expected to continue across most lines throughout 2026. A key reason for the widespread rate reductions is an abundance of capacity, with the region proving to be an attractive destination for international insurance providers.

  • Q3 2025 UK Insurance Market Outlook

    Article 12 mins

    Q3 2025 UK Insurance Market Outlook

    Buyer-friendly conditions in the UK insurance market remain and prices continue to soften across most lines. While there are opportunities to reinstate limits and broaden cover, the focus for insurance buyers on providing high quality risk information and demonstrating good risk management remains.

  • Credit Insurance and The Future of Energy

    Article 7 mins

    Credit Insurance and The Future of Energy

    In a conversation with Trade Finance Global’s (TFG) Deputy Editor, Mahika Ravi Shankar, Madeleine Whiteley, Senior Client Manager at Aon, explored how credit insurance is helping energy clients navigate volatility, adapt to the transition to renewables, and manage the uncertainties of today’s market

  • As Health Spend Soars, Employers Should Beware of Hidden Cost Threats

    Article 9 mins

    As Health Spend Soars, Employers Should Beware of Hidden Cost Threats

    While cancer care and specialty medicines are familiar culprits behind rising U.S. healthcare costs, benefit leaders should also watch out for less obvious factors driving up expenses. Taking a holistic view requires being aware of these hidden threats as you work to manage costs.

  • Risk Factors and Conditions Driving the Global Medical Trend Rate

    Article 8 mins

    Risk Factors and Conditions Driving the Global Medical Trend Rate

    The global medical trend rate is projected to dip below double digits for the first time in three years to 9.8%. It may be a hopeful sign that cost increases have plateaued, but cost increases are still elevated. We explain the risks and conditions behind the increase so employers can prepare.

  • 6 Insights to Build Risk Resilience in a Volatile Retail Market

    Article 9 mins

    6 Insights to Build Risk Resilience in a Volatile Retail Market

    Retailers in North America are navigating intense competition, shifting consumer demands and rising costs. Add to that a wave of evolving risks — from cyber to litigation — and the pressure mounts. These six insights can help retailers rethink their risk strategy.

  • Cyber Risk Is the Weak Link in Data Center Construction

    Article 8 mins

    Cyber Risk is the Weak Link in Data Center Construction

    Data center construction is booming — but cyber risk management hasn’t kept pace. As digital infrastructure becomes ever more critical, fit-for-purpose insurance solutions are essential to protect projects from costly cyber events that derail timelines and budgets.

  • Global Insurance Market Overview

    Article 23 mins

    Q3 2025: Global Insurance Market Overview

    Buyer-friendly conditions persisted in Q3, with ample capacity and intense competition driving continued price reductions and broader coverage for preferred risks, especially in property, cyber, and directors and officers.

  • Managing the Top 3 Risks in Infrastructure Projects: What You Need to Know

    Article 10 mins

    Resilient Infrastructure: 3 Risks to Watch

    Cost inflation, project complexity and tight schedules aren’t the only pressures facing infrastructure stakeholders. Emerging risks — from design and contract misalignment to tech-driven vulnerabilities — demand proactive risk management across the entire project lifecycle.

  • business-team-discussion-960645142

    Article 5 mins

    Rethinking Talent Strategy as H1B Visa Costs Rise

    As H1B visa costs surge, organizations face complex decisions in talent strategy and global workforce planning. This article explores how employers, talent, and industry must adapt holistically to remain resilient and competitive amid sweeping immigration and market changes.

  • Country-Level Findings

    Article 41 mins

    Country-Level Findings

    Explore how risk perceptions vary across countries with insights from Aon’s 2025 Global Risk Management Survey.

  • Top 10 Global Risks

    Article 1 mins

    Regional Results

    Aon’s 2025 Global Risk Management Survey explores how organizations across four regions are responding to top risks—revealing both the challenges they face and the opportunities to build resilience in a fast-changing world.

  • Logistics

    Article 11 mins

    High Stakes in High Tech: Securing the Technology Supply Chain

    As in-demand, high-value technology cargo travels through complex supply chains, any disruption can trigger costly delays and reputational damage. Leaders can manage volatility with a future-ready risk management approach backed by innovative insurance solutions and data-driven logistics.

  • 2026 Salary Increase Planning Tips

    Article 5 mins

    2026 Salary Increase Planning Tips

    Global voluntary turnover remains low, shaping cautious 2026 salary budgets and prompting a renewed focus on employee development to sustain engagement. Employers are balancing cost control with strategic investments in skills, paying high performers, pay equity and total rewards.

  • GRMS Industry Insights Hero Banner

    Article 1 mins

    Industry Insights

    Business risks impact industries in different ways. Aon’s 2025 Global Risk Management Survey reveals how organizations across nine sectors are responding to today’s most pressing threats—from geopolitical volatility and cyber risk to supply chain disruption and talent shortages.

  • Cyber and E&O: Pricing Holds, but Market Momentum is Shifting

    Article 10 mins

    Cyber and E&O: Pricing Holds, but Market Momentum is Shifting

    The global cyber and tech errors and omissions market continues to favor buyers — for now. As AI-driven threats, privacy litigation and supply chain exposures intensify, forward-thinking organizations are using this window to build resilience.

  • Business Interruption: Managing Risk in an Interconnected World

    Article 7 mins

    Business Interruption: Managing Risk in an Interconnected World

    Business interruption is the second-highest global risk in 2025 — but is expected to fall to seventh place by 2028. As interconnected threats multiply, from cyber attacks to climate events, organizations must diversify supply chains, embed geopolitical insight and regularly update continuity plans.

  • Cash Flow and Liquidity Hero Image

    Article 6 mins

    Cash Flow and Liquidity Risk: A Rising Challenge

    Cash flow and liquidity risk re-enters the top ten global risks in 2025 — and is expected to remain in tenth place by 2028. Amid an uncertain macroeconomic outlook, organizations must strengthen forecasting and unlock working capital to build financial resilience.

  • Commodity Price Risk and Material Scarcity: An Escalating and Complex Risk

    Article 7 mins

    Commodity Price Risk and Material Scarcity: An Escalating and Complex Risk

    Commodity price risk ranks sixth globally in 2025 — and is forecast to climb to fourth place by 2028. With supply chains strained by geopolitical tensions and climate disruption, organizations should consider hedging strategies, diversifying sourcing and exploring innovative risk transfer solutions.

  • Cyber Attack or Data Breach Hero Image

    Article 6 mins

    Cyber Risk: Turning Uncertainty into Opportunity

    Cyber risk tops the global risk agenda in 2025 — and is forecast to retain the number one position through to 2028. As digital threats evolve, organizations should strengthen resilience, quantify exposure and adapt their risk strategy.

  • Damage to Reputation or Brand Hero Image

    Article 5 mins

    Damage to Reputation or Brand: A Critical Risk

    Damage to reputation or brand ranks eighth globally in 2025 — but is expected to fall to nineteenth by 2028. In an era of cyber threats, ESG scrutiny and social media amplification, organizations should quantify reputational risk and embed preventive measures into enterprise strategy.

  • Geopolitical Volatility Hero Image

    Article 6 mins

    Geopolitical Volatility: Preparing for the Unpredictable

    Geopolitical volatility ranks ninth globally in 2025 — and is forecast to rise to fifth by 2028. With conflict, trade disruption and political instability on the rise, organizations must monitor global developments, regularly assess operational exposure and conduct scenario planning.

  • Increasing Competition Is Intensifying Risk for Organizations

    Article 5 mins

    Increasing Competition Is Intensifying Risk for Organizations

    Increasing competition ranks as the fifth biggest global risk in 2025 — and is projected to climb to number three by 2028. As technological disruption, talent scarcity and geopolitical shifts intensify market pressure, organizations must embrace agility, and rethink competitive strategy.

  • Navigating Regulatory and Legislative Change

    Article 8 mins

    Navigating Regulatory and Legislative Change

    Regulatory change ranks as the fourth biggest global risk in 2025 — and is expected to fall to sixth place by 2028. As policy shifts accelerate across sustainability, technology, trade and the workforce, organizations must adopt agile compliance strategies and unlock proactive risk management.

  • Supply Chain or Distribution Failure: Navigating the New Normal

    Article 9 mins

    Supply Chain or Distribution Failure: Navigating the New Normal

    Supply chain failure ranks seventh globally in 2025 — and is projected to fall to twelfth place by 2028. As weather-related disruption, geopolitical tension and cyber threats converge, organizations must balance efficiency with resilience and diversify sourcing.

  • Top 10 Global Risks

    Article 1 mins

    Top 10 Global Risks

    As risks increasingly overlap and evolve, managing them demands more than reactive strategies. This chapter explores the top-ranked risks from the survey and highlights how organizations that take a proactive, integrated approach can turn complexity into opportunity.

  • Why Economic Slowdown is an Ongoing Risk for Organizations

    Article 6 mins

    Why Economic Slowdown is an Ongoing Risk for Organizations

    Economic slowdown ranks as the number three global risk in 2025 — and is projected to rise to number two by 2028. Amid trade tensions, inflation and geopolitical instability, organizations must strengthen liquidity, enhance workforce agility and rethink capital strategies to stay resilient.

  • Client Trends 2025

    Article 11 mins

    In Conversation with Iberdrola: Navigating Megatrends

    Spanish energy multinational, Iberdrola – a leader in grids, storage and clean energy – talks with Aon about its efforts to adapt and respond to climate impacts through its shift towards renewables and building a workforce for the future.

  • 5 Bold Predictions for the Future of Total Rewards

    Article 6 mins

    5 Bold Predictions for the Future of Total Rewards

    Total rewards professionals must adapt quickly to changes in the workforce. Whether it's personalization of benefits powered by AI or a whole new language around total rewards, the near future may look very different than the status quo.

  • 5 Data-Driven Ways HR Can Optimize Costs

    Article 17 mins

    5 Data-Driven Ways HR Can Optimize Costs

    Data and analytics can unlock value for HR professionals in a variety of ways. From a unified global benefits perspective to personalizing total rewards, gathering and analyzing the right types of data help companies optimize what can be their biggest expense.

  • SPACs Return: Why D&O Risk Management Must Step Up

    Article 8 mins

    SPACs Return: Why D&O Risk Management Must Step Up

    SPACs are staging a comeback, but the risks that surrounded them in prior cycles remain. The challenge is to lead with proactive, strategic risk transfer that keeps stakeholders and balance sheets protected in a fast-evolving landscape.