Parametric insurance
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Parametric insurance is a type of insurance that does not indemnify the pure loss, but ex ante agrees to make a payment upon the occurance of a tiggering event. The triggering event is often a catastrophic natural event which may ordinarily precipitate a loss or a series of losses.
Parametric insurance may reduce transaction costs involved in writing and administering insurance policies because there is less need for actual loss assessment for payment of claims or underwriting rating requirements to determine the premium based on liabilities and extent of risk sharing.
Parametric insurance is ideal for low frequency but high intensity losses as in catastophic perils, weather related risks in agriculture or other economic activities, and risks sought to be covered without sufficient past history of losses captured as insurance readable data.
For example, the Multilateral Investment Guarantee Agency covers hurricane risks based on category parameters and the World Bank designs earthquake parametric insurance based on the rigour parameter of earthquake on an appropriate measuring scale.