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
Disciplined approach to managing an insurance company's bond portfolio duration. When interest rates rise, the average maturity and duration of the bond portfolio is lengthened, resulting ...
Life insurance and long-term disability income insurance on major employees, with benefits payable to the business. Key person insurance has these advantages: enhances the ability of the ...
Percentage return appropriated by the insurer for an immediate variable annuity when the insurer calculates the initial income payment to the annuitant. If the variable annuity's underlying ...
Investment risk associated with the changes in government policies that may have a dramatic effect on financial instruments. For example, if federal legislation is passed removing the ...
Exceptions to coverage. There is no obligation for an insurance company to pay a claim if: the loss is not covered by a policy, or a particular person is not included in the definition of ...
Coverage for the seller of property on an installment or conditional sales contract if it is damaged or destroyed. For example, a television set is sold on an installment basis but is ...
Act that prohibits employers from discriminating against employees in employee benefit plans, regarding contributions or benefits based on race or gender. ...
Existence of a financial need which permits in-service withdrawals of funds from a section 401 (k) plan or a section 403 (b) plan to pay tuition for post secondary education for a ...
Non qualified deferred compensation plan for highly compensated employees or select group of personnel. The reporting and disclosure requirements of the employee retirement INCOME SECURITY ...

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