Definition of "Catastrophe futures"

Deb Fisbeck real estate agent

Written by

Deb Fisbeckelite badge icon

Keller Williams Lincoln

Financial instrument traded on the Chicago Board of Trade (CBOT). By purchasing this future, the insurance company can hedge its risk exposure against possible future catastrophic losses. The CBOT releases a report each quarter showing on a state-by-state basis the premium amount and the line of insurance that has a catastrophic exposure. Each future contract has a stated value of $25,000 multiplied by the catastrophe ratio for that particular quarter. This multiplied result forms the basis for beginning to trade the quarterly catastrophic futures contract on the CBOT. If there is a high level of catastrophes such that the actual catastrophic loss ratio is greater than the expected catastrophic loss ratio, the futures contract increases in value and the insurance company purchaser gains the difference between the initial purchase price and the quarterly ending value of the contract. Conversely, if there is a low level of catastrophes such that the actual catastrophic loss ratio is less than the expected catastrophic loss ratio, the futures contract decreases in value and the insurance company purchaser loses the difference between the initial purchase price and the quarterly ending value of the contract.

image of a real estate dictionary page

Have a question or comment?

We're here to help.

*** Your email address will remain confidential.
 

 

Popular Insurance Terms

Life is unpredictable so to compensate this, people have invented insurance. Insurance deals with unforeseen events. Sometimes insurance companies cover only a part of your losses and a few ...

Procedure whereby there is no amortization of the employer's liability for the supplemental cost of an employee's future benefits to be paid at retirement. ...

Same as term Yield on Assets: annual or other periodic rate of return on investments. Because life insurance companies act as custodians of premiums for many years, until money must be ...

Same as term Cancellation Provision Clause: provision permitting an insured or an insurance company to cancel a property and casualty or a health insurance policy (circumstances vary; see ...

That which cannot be touched; having no meaning to the senses. It is represented by incorporeal rights in property (that which is evidence or represents value; for example, a copyright). ...

Annuity that begins payments after a single premium is paid. For example, the annuitant pays a single premium of $100,000 on June 1 of the current year and begins receiving a monthly income ...

Deductible that applies for the year. For example, a business pays for the first $40,000 of losses incurred during the year and the insurance company pays for all losses above that amount ...

Insurance company that underwrites and sells more than one line of insurance. ...

Actuarial method of crediting retirement benefits earned and the costs associated with these earned retirement benefits. An increment (unit) of benefit is credited for each year of ...

Popular Insurance Questions