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
Same as term Debit Insurance: life insurance on which a premium is collected on a weekly, bi-weekly, or monthly basis, usually at the home of a policyholder. The face value of the policy is ...
Reduction in rate reflecting the present value of a premium due on an annuity one year hence. ...
Coverage in which premiums do not increase or decrease for as long as the policy remains in force. In the early years of a policy, the premiums are greater than is necessary to pay ...
Early payout of anticipated death benefits from a rider attached to an existing policy or from a separate policy. The purpose is to allow the terminally ill insured an additional source of ...
Money set aside to pay for losses. Rather than buy insurance coverage for all potential losses, some businesses and individuals choose this form of self insurance to cover all or a portion ...
Taking over of an insurance company's assets by the State Insurance Commissioner when examination of the annual report reveals that the company is in substantial financial difficulty. The ...
Coverage for the federal government in the event of loss due to dishonest acts of federal government employees. ...
Personal insurance method used to analyze the amount necessary to maintain a family in its customary life-style, should the primary wage earner die. This includes such considerations as: ...
Point in time when a term life insurance policy terminates its coverage. ...

Have a question or comment?
We're here to help.