Trigger (Cat Bond)

The trigger is the contractual mechanism that determines whether a catastrophe bond's principal is deployed to pay losses. There are four main trigger types, each representing a trade-off between basis risk and settlement speed.

Indemnity triggers are tied directly to the sponsor's actual verified losses — zero basis risk, but settlement takes 12–24 months. Industry loss triggers pay when total insured losses across the whole market exceed a threshold (e.g. $30bn) based on PCS or PERILS estimates — faster, but introduces basis risk for the individual sponsor. Parametric triggers pay based on physical measurements (wind speed, earthquake magnitude, rainfall) at specific locations — settles within days, highest basis risk. Modelled loss triggers run a catastrophe model against the event to estimate the theoretical loss — blends indemnity accuracy with faster settlement.

Investors generally prefer parametric and industry loss triggers (cleaner, faster); cedants often prefer indemnity (exact loss coverage). The market has moved toward hybrid structures.