Traditional indemnity-based cyber insurance struggles to keep pace with the escalating frequency and complexity of cyber threats, resulting in a widening protection gap for industry. To address this, we propose a novel cyber parametric insurance framework based on firm-specific cyber vulnerability that is estimated using a dynamic factor model incorporating geographic location, firm size, and industry sector. Our framework helps cyber insurers reduce basis risk by accounting for temporal dynamics and firm heterogeneity into cyber risk assessment. It can also facilitate to tailor a risk mitigation solution by considering substantial variations in corporate vulnerability that is integrated into the parametric index with the duration of cyberattacks. We provide supporting evidence on this benefit of the proposed framework by demonstrating a reduction in basis risk of our parametric insurance without increasing insolvency, compared to a benchmark. This study can contribute to the development of sustainable and scalable cyber parametric insurance markets.