Toby Griffiths
Made first post
I really don't understand how the majority of the marking schedule for this question talks about the capital charge increasing following the change to parametric trigger instead of indemnity.
From what I understand, parametric trigger policies provide a pre-defined benefit upon the trigger event being met. Capital is held to protect against uncertain outcomes. Trigger based policies are inherently less volatile/uncertain (either you pay the pre-defined amount or you don't) - how can the argument be that capital increases??
For example, from the mark scheme (in italics):
Thanks,
Toby
From what I understand, parametric trigger policies provide a pre-defined benefit upon the trigger event being met. Capital is held to protect against uncertain outcomes. Trigger based policies are inherently less volatile/uncertain (either you pay the pre-defined amount or you don't) - how can the argument be that capital increases??
For example, from the mark scheme (in italics):
- Underwriting risk may increase as it will be more difficult to price a parametric policy
- How??? All you have to do is estimate the event probability then multiply by the pre-defined payout??
- Liquidity risk could increase as payment is required faster compared to indemnity based
- How can you argue that liquidity risk increases if you know with certainty what the payment will be if a claim occurs?
Thanks,
Toby