Glossary
Terms used in the framework.
Concise definitions of the terms that recur across parametric insurance, climate risk, and catastrophe finance.
- Parametric insurance
- An insurance contract that pays a predetermined amount when an objective trigger value is reached, rather than indemnifying a measured loss. Settlement is mechanical: trigger met → payout owed.
- Trigger
- The objective variable monitored by the contract — for example, sustained wind speed, cumulative rainfall, ground motion, temperature, or an industry loss total. The trigger must be observable and measurable to a documented precision.
- Threshold
- A value of the trigger at which the contract changes state. The most common thresholds are the attachment point (where payout begins) and the exhaustion point (where payout reaches its full limit).
- Basis risk
- The gap between the index payout and the policyholder's actual economic loss. Basis risk arises because parametric covers pay on a measured proxy, not on the loss itself; it can be reduced by trigger choice, scope, and curve design but cannot be eliminated.
- Catastrophe bond
- A capital-markets instrument in which investors provide collateral to an insurer or reinsurer; principal is forfeited if a defined catastrophe trigger fires. Cat bonds may use parametric, modeled-loss, or industry-loss triggers.
- Reinsurance
- Insurance purchased by an insurer to transfer part of its risk to another carrier. Parametric structures appear in reinsurance as standalone covers or as components within larger treaty programs.
- Weather derivative
- A financial contract whose value depends on a measured weather variable, most commonly temperature-based degree-day indices. Used by utilities, energy buyers, and agricultural businesses to hedge demand and yield exposure.
- Loss index
- An index whose trigger is a measured aggregate of insurance industry losses (or a modeled approximation), rather than a physical variable. Common as a trigger type for catastrophe bonds and industry-loss warranties.
- Attachment point
- The trigger value at which a payout first becomes positive. Below the attachment point, the contract owes nothing.
- Exhaustion point
- The trigger value at which the payout reaches its maximum (the contract limit). Above the exhaustion point, increasing severity does not increase the payout.