Parametric Trigger
A cat bond or insurance trigger based on a physical measurement rather than actual losses — enabling fast settlement.
A parametric trigger pays out based on a measurable physical or financial index — wind speed at a specific weather station, earthquake magnitude at a specific depth, a financial index crossing a threshold — rather than the cedant's actual losses. This removes the need for loss assessment, enabling settlement in days rather than months.
The defining characteristic is objectivity: the trigger either occurs or it doesn't, based on publicly verifiable data from authoritative sources (NOAA, USGS, satellite systems). This makes parametric structures ideal for capital markets distribution — investors don't need to audit claims.
The trade-off is basis risk. A parametric trigger designed to approximate a cedant's losses will always have some imperfection. The best-designed parametric structures use multiple measurement points and sophisticated index methodologies to minimise basis risk while preserving settlement speed.
Example usage
“The parametric trigger uses a weighted average of peak gust wind speeds from 12 NOAA weather stations across the Carolinas, paying out $25m per 10 mph increment above 100 mph.”
Frequently asked questions
What is Parametric Trigger?
A cat bond or insurance trigger based on a physical measurement rather than actual losses — enabling fast settlement. A parametric trigger pays out based on a measurable physical or financial index — wind speed at a specific weather station, earthquake magnitude at a specific depth, a financial index crossing a threshold — rather than the cedant's actual losses. This removes the need for loss assessment, enabling settlement in days rather than months.
How is Parametric Trigger used in practice?
The parametric trigger uses a weighted average of peak gust wind speeds from 12 NOAA weather stations across the Carolinas, paying out $25m per 10 mph increment above 100 mph.