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
Length of time insurance policy is in force. ...
Classification of insured life and health risks based on the sex of the proposed insured. Gender has long been one of many factors in classifying, accepting, and rating risks. For example, ...
Coverage for all personal property, regardless of location of an insured and household residents, including children away at school. Written on an all risks basis, subject to excluded ...
Excess or deficit of gross premium above the pure cost of insurance and expenses. The result becomes the valuation of the asset share of the policyholder at the end of a given year. The ...
Method of terminating a split dollar life insurance policy in which the company transfers its interest in the life insurance policy to the insured employee. Through such a transfer, the ...
Same as term Original Age: insured's age at the date a term life insurance policy is issued. An original age or retroactive conversion option permits the insured to convert the term policy ...
difference between the face value of a permanent life insurance policy and its accrued cash value. The pure cost of protection is based on this difference. For example, if the face value ...
Plans that are similar to stock appreciation rights (SARS) in that an employee is granted a contractual right by the employer to a stipulated number of units in the business, which is ...
Named peril policy is how it’s called in the Real Estate Industry the insurance policies that specify the perils it covers. Under a named peril policy, if anything that isn’t ...
Have a question or comment?
We're here to help.