- Enter the trigger probability
Use the estimated chance that the contract’s covered parameter will meet the trigger during one policy year.
- Set the contractual payout
Enter the gross payout associated with the trigger level you are comparing.
- Enter Option A pricing
Add its annual premium and any deductible-like payout reduction or retained amount.
- Enter Option B pricing
Use the same basis for the competing quote so the comparison is consistent.
- Review the modeled net cost
The calculator subtracts expected triggered payout value from annual premium and identifies the lower modeled cost.
Parametric Insurance Deductible Tradeoff Calculator
This calculator compares two parametric insurance options by combining each option’s annual premium with the expected value of a deductible-like amount applied to a triggered payout. It is useful when quotes differ on both price and the amount retained before the policyholder receives the full contractual payout.
Parametric coverage pays according to a predefined event trigger rather than the amount of a measured indemnity loss, so contract wording matters. Use the result as a pricing comparison for the assumptions you enter, then check the actual trigger, payout schedule, attachment terms, exclusions, and any deductible or payout reduction in the policy wording before making a coverage decision.
Compare two parametric policy options
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Result
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Lower modeled annual net cost
Option A modeled annual net cost—
Option B modeled annual net cost—
Option A net triggered payout—
Option B net triggered payout—
Annual cost difference—
Formula:
Modeled annual net cost = Annual premium − (Trigger probability × max(Gross payout − Deductible, 0))Where:
- Trigger probability: annual probability expressed as a decimal
- Gross payout: contractual payout for the selected trigger
- Deductible: amount removed from that payout under the entered assumption
- Annual premium: policy cost for one year
Assumptions: The model assumes at most one relevant trigger during the year and treats the entered probability as applicable to both options. Some parametric contracts do not use a conventional deductible, so enter zero when no payout reduction applies.
What the result means
A lower modeled annual net cost means the premium is lower after crediting the expected value of the triggered payout under your assumptions.
This is a contract-comparison model, not a prediction of actual losses or a substitute for reviewing policy wording.
Given:
- Annual trigger probability: 15%
- Gross payout: $100,000
- Option A premium: $7,000; deductible: $5,000
- Option B premium: $5,200; deductible: $15,000
Calculation:
Option A = $7,000 − (0.15 × $95,000) = −$7,250. Option B = $5,200 − (0.15 × $85,000) = −$7,550.
Result: Option B has the lower modeled annual net cost by $300.
Interpretation: Under these assumptions, Option B’s premium savings slightly outweigh its smaller net payout. A different trigger probability can reverse the ranking.
Does parametric insurance always have a deductible?
No. Many parametric contracts pay a preset amount once a defined trigger is met and may not use a traditional indemnity deductible. Enter zero if the quote has no payout reduction that functions like a deductible.
Why can the modeled annual net cost be negative?
A negative value means the expected triggered payout value exceeds the annual premium under the probability you entered. It does not mean the policy guarantees a profit because the trigger may not occur and basis risk can remain.
Should both options use the same trigger probability?
Use the same probability only when the trigger definition is materially comparable. If thresholds differ, estimate a separate probability outside this tool or compare scenarios one at a time.
What is basis risk in a parametric policy?
Basis risk is the possibility that your actual economic loss and the contract’s trigger-based payout do not match. A severe loss can occur without a payout, or a payout can occur when actual loss is smaller.
Can I use this result instead of reading the policy?
No. Verify the parameter source, trigger threshold, payout schedule, exclusions, waiting periods, and any retained amount in the actual contract.