The trigger of an insurance-linked security based on the losses actually paid by the sponsor, as opposed to an index or objective parameter.
An indemnity trigger ties a note's payment to the losses actually suffered by the ceding insurer, exposing the investor to the quality of its underwriting and reserving rather than to an objective phenomenon. It carries two classical flaws, moral hazard, the sponsor keeping control of the decisions that determine the loss, and slow settlement. Moving to an index or a parameter would remove these flaws but reopen basis risk, for want of a recognized calculation authority for cyber.
Every cyber catastrophe bond issued to date rests on an indemnity trigger, which has kept the market around a single sponsor of established reputation.
trigger indemnitaire