Catastrophic Insurance Futures And Options
Definition of "Catastrophic insurance futures and options"
First exchange-traded risk management tool specifically developed for the insurance industry by the Chicago Board of Trade as a way for the primary insurance company to offset its underwriting exposures. See also futures tied to reinsurance. These contracts are designed to provide the insurance company with a hedge against underwriting losses resulting from catastrophic occurrences. The futures contract is an agreement to buy or sell a commodity or financial instrument at a set price on a given date. The option permits the owner to decide whether or not to exercise the option to buy or sell the commodity or financial instrument by the stipulated exercise date. The insurance option trading is based on the loss ratio concept (losses incurred over a stipulated time period divided by premiums earned over the same time period). For example, assume an insurance company buys an option on the loss ratio that will fall within the range of 50% to 70%. Should losses fall within that range, the insurance company would then exercise the option and sell the contract, thereby enabling the company to make a profit on the option. This profit could then be used by the company to offset losses. Should the loss portion not fall within the 50% to 70% range, the option would expire at zero value.
Popular Insurance Terms
Independent, nonprofit, membership hospital plan. Benefits provided include coverage for hospitalization expenses subject to certain restrictions: for example, semiprivate room only. A ...
Illness or sickness such as cancer, poliomyelitis, leukemia, diphtheria, smallpox, scarlet fever, tetanus, spinal meningitis, encephalitis, tularemia, hydrophobia, and sickle cell anemia, ...
Inland marine policy to cover liability for goods that belong to clients while in a mover's possession. ...
Cost of doing business, not including pure expectation of loss. ...
Coverage for ships in port for a lengthy stay and/or those that are under repair. Insures on an all risks basis to include the exposures associated with the ship moving from one dock to ...
Right to sell a given security at a stipulated price until a future expiration date. For example, assume the "None-Do-Well" company's stock has a market value of $20. Investor A sells ...
In property insurance, contract section providing for reimbursement for removal of debris resulting from an insured peril. The amount of reimbursement under the homeowners insurance policy ...
Same as term Cargo Insurance: shipper's policies covering one cargo exposure or all cargo exposures by sea on all risks basis. Exclusions include war, nuclear disaster, wear and tear, ...
Financial holdings that can be converted into cash in a timely manner without the loss of principal, such as U.S. Treasury Bills. Liquidity of assets is one of the most important principles ...
Have a question or comment?
We're here to help.