Parametric vs indemnity trigger

September 8, 2017: a magnitude 8.2 earthquake hits southern Mexico, and the catastrophe bond the World Bank had placed for the country pays 150 million dollars on the crossing of a measured threshold alone, without waiting for a single damage assessment. The trigger mechanism decides how and when a cover, such as a cat bond or parametric insurance, pays out. An indemnity trigger starts from the loss the insured actually suffered, measured by conventional loss adjustment. The payout tracks the damage, but settlement takes time and adjustment costs money. A parametric trigger starts from an objective, measurable parameter that has nothing to do with the actual loss: an earthquake's magnitude, wind speed, the length of an outage. Once the parameter crosses the agreed threshold, the payout is automatic, with no adjustment, so it is fast and transparent. The catch is basis risk, the possible gap between what the parameter triggers and the economic loss actually suffered, which can leave the insured under- or over-indemnified. Choosing between the two means trading speed against precision. In cyber and algorithmic risk, parametric cover draws interest because, through oracles and smart contracts, it could pay on a measurable event such as an API outage, where an opaque loss cannot be adjusted in any detail.