Parametric insurance pays on what happened, not just what was lost -- and that changes everything about the claims experience.
Traditional indemnity insurance requires loss verification, adjustment, and settlement -- a process that can take months for complex commercial claims. Parametric products trigger payment automatically when a defined threshold is crossed: a hurricane reaches Category 3 wind speed, an earthquake exceeds a given magnitude, rainfall falls below a drought threshold.
The speed of payment is the primary value proposition, particularly for businesses whose cash flow cannot sustain a prolonged claims adjustment process following a catastrophic event.
Basis risk -- the possibility that a trigger fires but the insured suffers limited loss, or vice versa -- remains the central structural challenge that product designers must address thoughtfully.
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