For instance, when spot prices are below the Insured’s cost of generation, it may choose to reduce its output and procure power on behalf of its customers from the open market instead. These spot prices vary at every interval and therefore past trends alone are unlikely to serve as a reliable guide for the indemnity period.
Accordingly, we based our model on a combination of market prices, the profit-sharing formula and the plant’s historical operations. Based on the open-market sales we noticed that the insured might not want to sell all of its unutilised capacity and preferred to maintain a certain bu’er in the event there was a sudden spike in contract customers’ demand.
While the model was complex, we used it to capture various scenarios the insured would have encountered. Additionally, we simplified the summary schedule and directed the parties on the material assumptions they had to consider during the claim settlement process.
The insured appreciated our understanding of its operations and the model we built. As a result, it was very cooperative and provided the requested information to ensure we considered all of the necessary parameters related to the loss. This collaborative approach resulted in a much faster settlement than other comparable power generation losses.