The underwriting manager in charge of Energy has asked you to build a model to cover operations all risks (OAR) for Offshore Windfarm. This model will cover property damage (PD) only.

As a starting point, you decide to build a simple model in which each windfarm is modelled as a single property, based on these initial inputs from the underwriter, based on their market experience:

• Base loss rate for PD is 0.5% of sum insured at the standard deductible of

$100,000.

• The main risk factors are the depth of the installation and its distance from shore.

• Depth can be ‘shallow’ or ‘deep’. ‘Deep’ attracts an extra 10% of premium.

• Distance from the shore can be either ‘close’ or ‘far’. ‘Far’ should attract an extra 15% of premium.

• The base loss rate of 0.5% refers to the base case of shallow/close.

• The deductible effect is based on Swiss Re exposure curve with c = 5.

• Target loss ratio is 57%.

The model is used to calculate the technical premium for any layer of insurance L xs AP where L is the limit and AP is the attachment point, measured in excess of the underlying deductible.

The model should also calculate the performance excess, i.e. the (algebraic) difference between the commercial premium and the technical premium, both as a monetary amount and as a percentage.

The model is on a spreadsheet and once the pricing is complete the spreadsheet is saved in a special folder that contains all completed pricings.

a. Describe the architecture of the model, defining the inputs, outputs, parameters, and the calculation engine (i.e. the operations necessary to calculate the required outputs of the model).

b. A client, Never2Windy Ltd, which owns a small windfarm of $20M of value far away from the shore and in deep waters, asks for two quotes for an OAR policy: one (i) for insuring the full value of its windfarm in excess of a $200k deductible, and one (ii) just for a layer of $15m xs $4.8m. Calculate the technical premium for cases (i) and (ii).

c. Explain what the limitations of this simple model are.