Parametric reinsurance
Parametric reinsurance pays a predefined amount when an objective, measurable trigger is met, such as a hurricane of a set wind speed or an earthquake above a chosen magnitude, rather than reimbursing the ceding company's actual losses.
Traditional, or indemnity, reinsurance pays the ceding insurer based on the losses it actually incurs and adjusts. Parametric reinsurance works differently: the contract defines a trigger tied to a measurable index or physical parameter, such as wind speed, earthquake magnitude, rainfall totals, storm track, or a modeled loss index. If the trigger threshold is reached, the agreed amount is paid regardless of the exact loss the cedent suffered.
This structure matters because payouts can be fast and transparent, since there is little or no claims adjustment to complete before money changes hands. The main trade-off is basis risk, the gap that can arise when the parametric payout is larger or smaller than the actual economic loss. Parametric approaches are often used for natural catastrophes and for newer perils where historical loss data is thin.
As a simple example, a reinsurer might agree to pay a fixed amount to a cedent if a hurricane of Category 4 or higher makes landfall inside a defined geographic box during the contract period. If that event occurs, the payment is triggered even though the cedent's ultimate claims are still being counted.
Because parametric structures suit hard-to-model and emerging exposures, they are one way an AI-native reinsurer such as RiskCube Re can provide capacity to MGAs and carriers underwriting complex risks.
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Definitions are educational and general, and specific contracts, endorsements, and state rules may modify them. For regulatory guidance, refer to the NAIC or the Insurance Information Institute.