Kompenseerivate

Kompenseerivate is a term used in some Dutch- and Afrikaans-language financial literature to describe a family of derivative instruments designed to provide compensation to a party in the event of predetermined losses or to offset exposure arising from another contract or external event. The concept is not standardized across international markets and meanings can vary, but it generally refers to contracts whose primary purpose is to deliver a compensatory payment rather than a speculative payoff.

Typically, a kompenseerivate functions as a contingent claim whose payoff depends on a specified trigger and the level of exposure to be compensated. Triggers can include credit events, underperformance of a reference asset, regulatory penalties, environmental damages, or other predefined adverse outcomes. The structure may resemble a swap with a compensation leg, an option-like payoff, or a bespoke contingent instrument. Payoffs are often bounded by caps or floors to control cost and risk.

Applications tend to be niche and bespoke. They may be used to hedge losses from other contracts, to provide compensation for externalities or regulatory costs, or to support risk-sharing in projects with limited traditional insurance options. In climate or project finance, kompenseerivate concepts can help pool risk or deliver pre-agreed compensation under downside scenarios.

Valuation of kompenseerivate relies on modeling the probability and timing of triggers, exposure at risk, and correlation with the reference asset. Pricing also considers counterparty risk, liquidity, and regulatory treatment, which can be challenging given the bespoke nature of many structures.

Risks include model risk, basis risk, moral hazard, and potential mispricing due to infrequent trading. The instrument remains relatively experimental and is typically offered only by specialized banks or in custom arrangements.

See also: insurance-linked securities, catastrophe bonds, contingent claims.