Indemnity Trigger
Definition
An indemnity trigger makes an insurance-linked security pay according to the sponsor's own losses from a covered event: once the sponsor's losses pass the attachment point, the security reimburses its actual losses up to the limit. It works like conventional reinsurance. The sponsor carries no basis risk, because recoveries follow its real losses, while investors take on the sponsor's underwriting, claims handling and reporting as well as the catastrophe itself.
Why it matters
An indemnity trigger is the closest an investor gets to being a reinsurer. It pays exactly what the sponsor lost, which suits the sponsor, but it means the investor depends on how the sponsor writes and settles claims and on information only the sponsor has. Settlement takes longer, loss estimates can move for years, and collateral can stay trapped while they do.
Common misconceptions
- •No basis risk for the sponsor does not mean less risk for the investor.
- •Actual losses are not known at the event; they develop as claims are paid and reserved.
- •An indemnity deal is not a bet on the storm alone. Claims practice and policy terms change the outcome.
- •The label is only a starting point. Investor outcomes usually depend on the governing documents, cash-flow priority, valuation policy, disclosure quality, and manager discretion surrounding the term, not just the shorthand definition used in marketing materials.
Technical details
What to read
Definition of ultimate net loss and what counts toward it.
Covered perils, territory and the hours clause that defines one event.
Loss reporting dates, extension periods and dispute or commutation terms.
The sponsor's portfolio data provided to the modeling firm.
Indemnity versus other triggers
Basis risk to sponsor: none (indemnity) to highest (pure parametric).
Transparency to investor: lowest (indemnity) to highest (parametric).
Settlement speed: slowest (indemnity) to fastest (parametric).
How investors apply the term
Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.
The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.
Frequently asked questions
- Why do investors want more spread for indemnity deals?
- Swiss Re's 2011 primer says investors are exposed 'not only to the natural catastrophe risk, but also to unexpected secondary loss effects' and 'to the operational risk of the ceding company's underwriting and claims functions,' and that rating agencies may require extra stress testing.
- How long does an indemnity deal take to settle?
- Longer than a parametric or index deal, because the sponsor's claims must be reported, adjusted and developed. Principal can be held under extension provisions while losses are measured.
- Do large insurers use indemnity triggers?
- Yes. Allstate's 2025 10-K describes ILS contracts reinsuring losses from catastrophes 'determined to be a catastrophe by the Company,' with recoveries 'limited to the ultimate net loss from the reinsured event,' language tied to its own losses.