Is It Time to Consider Parametric Insurance for Commercial Wildfire Risk?

Wildfire exposure is making property insurance inaccessible for many. As insurers hike their rates or pull out of markets entirely, businesses and property owners are struggling to manage their risks. Parametric insurance, which pays claims based on the magnitude of the event instead of the magnitude of a loss, provides an innovative risk management option, which can be layered with other strategies to strengthen protection.

The Escalating Wildfire Crisis

Wildfires have become a growing threat to businesses, and it’s not just rural businesses like vineyards and logging companies that are at risk. In recent years, wildfires like the Santiam Fire in 2020 have all but destroyed entire communities. In the wildfires that struck Los Angeles in January 2025, many businesses were destroyed along with houses. LA Today’s list of businesses that were damaged or destroyed catalogued more than 20 businesses, including a senior center, a nursery, a theater, a grocery store, a bait shop, a pet supply and feed shop and numerous restaurants. Clearly, wildfires are a threat to all types of businesses in rural, suburban and urban areas.

The risk is not entirely new, but warmer temperatures have exacerbated the problem  The National Interagency Fire Center says that wildfire season has also gotten longer, now starting earlier in the spring and lasting later into autumn, and warmer nighttime temperatures complicate firefighting efforts. Although the total number of wildfires has been largely consistent over the last 20 years, the amount of land burned has increased nearly every year.

Source: National Interagency Fire Center via Science.NASA.gov

Searching for Risk Management Solutions

Because of the increase in frequency and severity of wildfires, insurers have pulled back from wildfire exposures in recent years, and this has forced many businesses and homeowners to rely on their state FAIR plans for coverage. FAIR is the acronym for Fair Access to Insurance Requirements. The situation is far from ideal. Compared to a traditional property insurance policies, FAIR policies typically cover fewer perils and offer fewer policy options.

Better wildfire risk mapping has emerged as a possible way to take control of the insurance crisis, but implementation has proven difficult and controversial. The Oregon House recently voted to repeal a wildfire hazard map and the home-hardening requirements that went along with it after rural Oregonians argued the map was flawed and would drive up insurance costs unfairly.

Now,  many businesses are considering parametric insurance as a potential piece of the solution in the increasingly complex wildfire insurance puzzle.

How Wildfire Parametric Insurance Works

Traditional property insurance pays for physical loss to covered property caused by covered perils. For instance, if your property policy has a $5 million limit, and you experience a $1 million wildfire loss, the policy would pay the $1 million claim, minus any deductible. The advantage of this type of policy is that the property owner receives coverage for losses, and if they’ve purchased sufficient coverage, they’ll be able to rebuild after a disaster. However, there are also downsides, including the need for lengthy claims processes to determine the exact value of the loss – and the fact that many insurers will not offer fire coverage in wildfire areas.

Parametric insurance works differently. Claims are paid based on the occurrence of a specific event. The value of the claim is not tied to the actual losses. Instead, claims are paid based on the magnitude of the event according to pre-defined terms, known as the parameters of the policy. These parameters often involve the location and intensity of the event. As soon as the event itself is confirmed using the method outlined in the policy, the claim can be paid.

Business Insurance reports that interest in parametric insurance has increased since the Los Angeles wildfires.

Creatively Defining Parametric Loss Parameters

It’s possible to customize parametric insurance policies in ways that may not be possible with traditional insurance. This is done by defining the policy’s trigger event, loss threshold and payout amount.

A wildlife parametric policy may be written to pay out if a wildfire crosses a pre-determined boundary in relation to the insured’s the property location. This type of trigger may be appropriate for many types of businesses, including restaurants, retailers, senior living facilities and other habitational properties.

Additionally, policy components can be customized to address other exposures related to wildfire such as crop damage, smoke taint, business interruption, supply chain interruption or resident evacuation costs. For example, a winery that’s worried about smoke taint may select a trigger based on air pollution indexes.

Layering Policies to Maximize Protection

Wildfire parametric insurance can be combined with traditional insurance to create a layered solution. For instance, a property owner could purchase a property insurance policy with a high fire deductible to drive down the premium cost and then add an additional layer of wildfire protection in the form of a parametric insurance policy.

Because parametric policies can pay out quickly, the funds can be used to help with immediate expenses. For example, a senior care facility or apartment complex could use its payout to cover evacuation costs. By strategically layering parametric and traditional insurance, property owners can not only reduce premium costs but also ensure rapid access to funds when it matters most—bridging the critical gap between disaster impact and recovery.

Next Steps

Are you interested in parametric insurance for wildfire risk? Propel is your partner in creative risk management. Contact Shon or anyone on your Risk Advisory team here at Propel to learn more.