The contrast between a trigger based on an objective parameter and one based on the actual loss suffered.
The trigger mechanism determines how and when a cover, notably a cat bond or parametric insurance, pays its indemnity. The indemnity trigger rests on the loss actually suffered by the insured, measured by conventional loss adjustment, which guarantees an indemnity aligned with the damage but introduces a settlement delay and an adjustment cost. The parametric trigger, by contrast, rests on an objective, measurable parameter independent of the actual loss, for example an earthquake's magnitude, wind speed or the duration of an outage. As soon as the parameter crosses the agreed threshold, the indemnity is paid automatically, without adjustment, ensuring remarkable speed and transparency. The downside of the parametric approach is basis risk, that is, the possible gap between the indemnity triggered by the parameter and the economic loss actually suffered, which can leave the insured under- or over-indemnified. The choice between the two logics therefore reflects a trade-off between speed and precision. In cyber and for algorithmic risk, the parametric approach attracts attention because it could allow, through oracles and smart contracts, an indemnity to be triggered on a measurable event such as an API outage, circumventing the impossibility of finely adjusting an opaque loss.
A parametric cover pays a fixed indemnity as soon as a major cloud provider exceeds twelve hours of downtime measured by a third party, regardless of each insured's exact loss.
trigger paramétrique, trigger indemnitaire, déclencheur paramétrique