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<p>Under parametric insurance, the indemnity is a function of a publicly-observable parameter vector correlated with the loss incurred by the policyholder. The parameter vector yields a loss index, which is the conditional expected value of the loss, the basis risk being the random difference between the actual loss and the loss index. We analyze how the design of the optimal parametric insurance contract depends on whether the parameter vector and the basis risk are independently distributed or not. We also show that a more accurate information structure reduces the size of the basis risk, but that a smaller basis risk is not the guarantee of a more efficient insurance coverage.</p>

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On the design of optimal parametric insurance

  • 期刊论文

  • 发表日期：

    2026年3月24日

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  • Alexis Louaas,
  • Pierre Picard

摘要

Under parametric insurance, the indemnity is a function of a publicly-observable parameter vector correlated with the loss incurred by the policyholder. The parameter vector yields a loss index, which is the conditional expected value of the loss, the basis risk being the random difference between the actual loss and the loss index. We analyze how the design of the optimal parametric insurance contract depends on whether the parameter vector and the basis risk are independently distributed or not. We also show that a more accurate information structure reduces the size of the basis risk, but that a smaller basis risk is not the guarantee of a more efficient insurance coverage.