What is a Parametric Trigger?
A trigger based on physical event parameters (e.g., wind speed, earthquake magnitude) rather than actual losses. Faster payout but introduces basis risk.
Parametric Trigger
A trigger based on physical event parameters (e.g., wind speed, earthquake magnitude) rather than actual losses. Faster payout but introduces basis risk.
How it works in practice
A Caribbean island nation buys a parametric cat bond triggered by central pressure readings. If a hurricane passes within 100 kilometres of the capital with a central pressure below 930 millibars, the bond pays out in full. After a Category 4 storm crosses the zone with a pressure reading of 918 millibars, the weather station data confirms the trigger is met and payout occurs within weeks, without any claims adjustment process.
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