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
State operated insurance company used in workers compensation insurance in some states where the risks are so great that the commercial insurance companies cannot operate at affordable ...
Coverage for the insured's personal and real property and the insured's own person. Contrast with third party. ...
Plan wherein total withdrawal or income payments from tax deferred savings plans exceed $150,000 in any one year. An excess distribution tax of 15% of the amount greater than $150,000 must ...
Application of conventional terms and conditions to the reinsurance of a risk. Contrast with non-traditional REINSURANCE. ...
Right of one party to use land owned by another party. For example, an electric utility can obtain an easement through court action to place its power lines across someone's property, even ...
Type of inland marine insurance that covers pipelines. Although pipelines are stationary, the coverage is written on inland marine forms because they are considered part of the ...
Theory that the probability that two independent events will occur is equal to the probability that one independent event will occur times the probability that a second independent event ...
Coverage for an advertiser's negligent acts and/or omissions in advertising (both oral and written) that may result in a civil suit for libel, slander, defamation of character, or copyright ...
Method of premium payment under which a temporary premium is charged based on projected loss experience. At the end of the year this premium is adjusted to reflect the actual loss ...

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