Notes
Working write-ups — the kind of analysis that does not fit in a paper and should not wait for one.
“Just re-calibrate the trigger” is the standard answer to basis risk. On ten years of European wind data, re-tuning does help, up to a point: the fairest available setting still misses roughly 6.7% of whole droughts and leaves about 19% of drought-hours unpaid.
Parametric covers pay on a weather number, not on your loss — and the gap between the two has a name almost nobody measures. What basis risk is, why a 0.98 correlation doesn't protect you, and why the quiet failure mode costs more than the dramatic one.
In July 2026 the Mediterranean averaged 27.0 °C at the surface — 2.4 °C above the 1982–2011 norm, the warmest July in the 45-year satellite record. Four datasets built by rival methods in three countries agree on why: the basin is warming at ~0.36 °C per decade, twice the global-ocean rate.
The same drought was worth almost nothing, then worth US$8m — and nothing about the weather changed. An independent re-analysis on public data, asking which half of a parametric payout was actually doing the work.
Basis risk in parametric insurance: a working definition — the standing definition these notes build on.
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