Define the parametric trigger: index type (e.g., wind speed, rainfall, temperature), measurement station or grid point, threshold value, and policy period
Subscribe to or poll an authoritative weather data API (e.g., NOAA, DTN, The Weather Company) for the relevant index measurements at the policy location
At measurement intervals, compare the observed index value against the trigger threshold and record each observation with timestamp and data source
When the trigger condition is met (e.g., sustained wind speed exceeds threshold at the agreed measurement point), log the trigger event and initiate the claims workflow
Calculate the payout amount per the parametric schedule: linear, step-function, or cap-and-floor structure defined in the policy terms
Initiate the automatic payment via the disbursement API without requiring a loss assessment or traditional claims process, and notify the insured of the payout
Known gotchas
Basis risk is the primary product design challenge: the weather station measurement may not accurately reflect the actual loss experienced at the insured location; disclose this risk clearly to insureds
Data source availability and historical data continuity must be verified before product design; if the measurement station goes offline during a trigger event, the contract must specify a fallback data source
Automatic payout triggers may require regulatory approval as a policy endorsement or product form filing in many states; confirm that the parametric payout mechanism is included in the filed product form
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