Parametric Trigger
Insurance-Linked Securities
Definition
A parametric trigger pays based on measurable event parameters, such as wind speed, earthquake magnitude, rainfall, or location, rather than actual indemnified losses.
Why it matters
Parametric structures can settle quickly and transparently, but they introduce basis risk because payment depends on the measured parameter rather than actual economic damage.
Common misconceptions
- •Fast payout does not mean perfect hedge; the trigger can miss actual losses.
- •Parameter measurement source and location definitions can be as important as the threshold itself.
Technical details
Measurement
Contracts specify data sources, measurement stations, event windows, geographic zones, interpolation rules, thresholds, and calculation agents.
Investor Review
Review modeled frequency, severity, historical event calibration, data integrity, trigger manipulation risk, and how basis risk is allocated between sponsor and investor.