Instead of assessing actual damage after the fact, parametric insurance pays automatically the instant a measurable index (rainfall, wind speed) crosses an agreed line.
payout = 1_if(index >= trigger) * fixed_sum
no loss adjustment needed
- Insured regions — policyholder regions/nodes covered by the parametric scheme.
- Regional correlation — how correlated hazard events are between neighbouring regions (a cyclone rarely hits one region alone).
- Event frequency — how often a qualifying climate event (drought index, wind speed) occurs.
- Payout trigger threshold — the objective index level that fires an automatic payout, no claims adjuster required.
Parametric schemes like the African Risk Capacity pay out within days of a drought index breach, versus months for traditional loss-adjusted insurance.