Pricing Multiple Triggers - An Electrifying Example

For insurance products, multiple loss triggers have emerged as a tool for both risk managers and insurance companies to customize coverage. This paper will focus on an example drawn from a utility industry coverage that has triggers based separately on spot prices for electricity and lost power generation capacity. This paper provides a background to the current electric industry to help understand the interaction of the triggers. A regional supply and demand model for electric power is described that will simulate spot prices for electricity. A separate model is developed to simulate generation plants and their failure. Losses are calculated as a Monte Carol simulation using the combined interaction of the supply/demand model and the plant generation model. Expanding the model to include various other triggers and the shortcomings of available hedges is also discussed. Finally, some practical observations on pricing multiple triggers will be drawn from the example.