Index trigger

An index trigger makes payment depend on a value published by an independent third party, generally an industry insured loss index for a given event, sometimes weighted by the geographic spread of the sponsor's portfolio. It sits between a parametric trigger, based on a physical measurement, and an indemnity trigger, which reproduces the cedant's actual losses. The problem it solves is twofold: it removes information asymmetry, since the investor need not audit the sponsor's underwriting, and it shortens settlement dramatically, the index being published within months where an indemnity run-off takes years. The cost is basis risk: the sponsor's losses can diverge from the index if its book is more concentrated or more exposed than the market. Geographic weighting narrows that gap without closing it, and calibrating the weighting basket is the main object of negotiation on this kind of structure.

A 2026 cat bond triggers when the industry insured loss index for a windstorm event exceeds 8 billion euros, weighted by county on the sponsor's portfolio distribution. A storm produces a weighted index of 9.2 billion and the note pays 40 percent of principal. The sponsor's actual losses would have justified 51 percent: the 11 point gap is its basis risk, retained net.

Index trigger, Déclencheur sur indice, Industry index trigger, Trigger indiciel