What is parametric insurance in reinsurance?

Parametric cover pays when a measured parameter crosses a stated trigger, not when ACME Construction Ltd proves its indemnity loss. Wind speed at a named station, earthquake magnitude in a named box, rainfall over a named window: those are the contract, if they are in the wording. The payout table is a field. Basis risk is the gap between that payout and the actual loss. Do not sell parametric as indemnity with a faster cheque.

Treaty reinsurance still applies when the parametric is a treaty layer. Facultative parametric is still a pack. Either way, the trigger definition must be extracted with a span. A covering email that says "CAT parametric" is not a station, a threshold, or a notional.

Trigger, not loss

Fictional walkthrough: ACME Construction Ltd, acme.example. The cedent buys a parametric layer that pays USD 2,000,000 if a named weather station records a three-second gust of 120 miles per hour or more during a 72-hour window defined in the wording, while ACME has buildings in the stated box. A storm occurs. The station records 124 miles per hour. The parametric pays USD 2,000,000 even if ACME's indemnity loss is USD 400,000. If the station records 118 miles per hour and ACME's indemnity loss is USD 3,100,000, the parametric pays nothing.

That is the product. Operators who treat the USD 2,000,000 as an excess-of-loss recovery against ACME's ground-up loss will reconcile it forever. The claims bordereau for indemnity XoL and the parametric settlement file are different ledgers. Reinsurer operations should post the parametric against the trigger report, with the station file attached, not against Slip.pdf page 2's occurrence limit of USD 10,000,000.

ACME's slip TIV is USD 42,000,000 versus SOV USD 47,100,000. Indemnity cover cares which schedule is on risk. Parametric cover cares whether the locations used to define the box match the schedule you think is in force. If the extra warehouse is outside the box, basis risk moved. If it is inside the box but not on the slip, you may have paid a trigger on a location nobody bound. Show both maps. Do not average TIV and call it the box.

What must be in the wording

Station or index identifier. Threshold. Unit. Window. Reporting agency. Calculation agent. Payout notional or table. Dual trigger if any. Hours clause if the window is event-based. Payment timing is a clause, not a marketing promise. Source-grounded extraction that fills "Category 4" because that is common has hallucinated a trigger. If the page says 120 miles per hour at Station KXYZ, that is the field.

If the parametric sits beside indemnity excess of loss on the same ACME programme, name both contracts on the recovery. Do not net the parametric payout against the XoL attachment of USD 5,000,000 unless the wording says the indemnity recovery is excess of parametric proceeds. That sentence is either in the contract or it is a gap.

Basis risk is an operations fact

Basis risk is not a footnote for the ILS slide. It is why ACME can have a large loss and a zero parametric recovery, or a small loss and a full notional. Accounting that books parametric as if it were paid loss on the indemnity layer will distort loss ratio and IBNR. Keep the settlement paper: the agency report, the calculation, the payout. If the report is missing, the recovery is a gap, not a booking.

Do not invent satellite-precision claims this site cannot show. The honest test is whether a technician can open the trigger clause and the observation. If they cannot, you do not have parametric operations. You have a heading.