Hybrid trigger

A hybrid trigger is a payout mechanism that combines conditions of different kinds, usually an index or physical parameter and the cedent's actual loss. It cuts basis risk without going back to a pure indemnity structure. The industry loss warranty (ILW) is the oldest form. An ILW pays only if the published market loss, from PCS (Property Claim Services) in the United States, crosses the agreed threshold. The buyer must also be able to show its own ultimate net loss at least equal to the limit claimed. Two gates, of two different kinds. The first is objective and fast; the second shuts out anyone buying protection with no exposure, which is enough to keep the contract on the insurance side of the line rather than the derivative side. In practice the term covers everything between parametric and indemnity. Some cat bonds layer an industry index with cedent-specific factors, weighted by zone and line of business: the modified index, or weighted industry index. Others trigger on a physical parameter, a magnitude or a wind speed inside a box, then cap the payout at the loss actually incurred. Others pay a quick parametric advance and settle the balance on an indemnity basis once the adjusting is done. The underwriter gets a tighter fit between trigger and claim; the investor gives up some transparency, since the second condition rests on data it cannot see and on a longer settlement period. The structure does not remove basis risk, it moves it: a heavy real loss under an index that does not budge still goes unpaid. The price of the second gate shows up in the spread and in the loss verification clauses, often handed to a calculation agent.