Indemnity Trigger
A cat bond trigger tied to the sponsor's actual verified losses. No basis risk, but slow settlement (12–24 months).
An indemnity trigger pays out a catastrophe bond or reinsurance contract based on the sponsor's actual, verified losses from a qualifying event. Because the payment is tied directly to real losses, there is no basis risk — the sponsor is fully compensated for what it actually lost.
The trade-off is settlement time. Indemnity triggers require full loss development, which can take 12–24 months or longer for complex events. Investors must wait before receiving principal back, introducing more uncertainty than parametric or industry-loss structures.
Indemnity bonds also require greater disclosure — investors must be comfortable with the sponsor's book composition, claims handling practices, and portfolio quality. This makes indemnity cat bonds less fungible than parametric structures but more precise for the cedant.
Despite the slower settlement, indemnity is the dominant trigger type in the cat bond market by notional, as cedants prioritise eliminating basis risk.
Example usage
“USAA issued a $500m indemnity cat bond covering its actual homeowners losses from US hurricane and earthquake events.”
Frequently asked questions
What is Indemnity Trigger?
A cat bond trigger tied to the sponsor's actual verified losses. No basis risk, but slow settlement (12–24 months). An indemnity trigger pays out a catastrophe bond or reinsurance contract based on the sponsor's actual, verified losses from a qualifying event. Because the payment is tied directly to real losses, there is no basis risk — the sponsor is fully compensated for what it actually lost.
How is Indemnity Trigger used in practice?
USAA issued a $500m indemnity cat bond covering its actual homeowners losses from US hurricane and earthquake events.