Health Insurance Futures
Definition of "Health insurance futures"
One-year futures contract (standardized agreement between two parties to buy or sell a commodity or financial instrument on an organized futures exchange such as the CBOT within some future time period at a present stipulated price), traded at the Chicago Board of Trade (CBOT), which would allow health insurance companies and self-insured employers to hedge their losses. The essential design of this contract is such that when actual claims exceed expected claims by amount "X," the futures contract would increase by the same amount "X." The financial instrument that forms the basis of this futures contract is an index that reflects the claims experience of ten health insurance companies. By buying futures contracts that will appreciate in the future as claims increase in the future, insurance companies and self-insured employers can profit from increasing futures prices through which they can offset their losses. Accordingly, by selling futures contracts that will decline in the future, these organizations can profit from decreasing futures prices that can be used to offset smaller cash flow. For example, if a health insurance company buys a futures contract for $40,000 and then sells it for $50,000, the company will recognize a profit of $10,000, which can be used to pay the higher than expected claims incurred. The cost effectiveness of hedging through the buying and selling of futures contracts depends on high correlations between expected claims payments and the futures contracts prices. If there is a low correlation between expected claims payments and the futures contracts prices, the less cost effective the hedge becomes. Thus, it is critical for the insurance company or the self-insured employer to establish the correlation between its block of business and the health insurance futures index.
Popular Insurance Terms
Method of transferring pure risks that is perhaps the seed of the modern day insurance policy. Ancient Greece held to the concept that a loan on a ship was canceled if the ship failed to ...
Elements within a group under study that have the same characteristic (s), have the same expectation of loss, are very much alike with respect to the variable under consideration, and do ...
Life insurance policy clause. If at the end of the grace period the premium due has not been paid, a policy loan will automatically be made from the policy's cash value to pay the premium. ...
Same as term Occurrence Basis: coverage, in liability insurance, for harm suffered by others because of events occurring while a policy is in force, regardless of when a claim is actually ...
Same as term Cost-Of-Living Adjustment: automatic adjustment applied to Social Security retirement payments when the consumer price index increases at a rate of at least 3%, the first ...
Same as term Excess of Loss reinsurance: method whereby an insurer pays the amount of each claim for each risk up to a limit determined in advance and the reinsurer pays the amount of the ...
Money paid through state and federal programs to workers who are temporarily unemployed. The program, which was created by the social security act of 1935, is managed by the individual ...
Insured peril in some property insurance policies that encompasses any accidental damage to insured property while being removed to safety from the immediate threat of damage by another ...
Account established to manage the assets of a minor. This account is under the auspices of a custodian (either an individual or an institution). The gift tax exclusion would apply on any ...
Have a question or comment?
We're here to help.