Catastrophic Insurance Futures And Options
Definition of "Catastrophic insurance futures and options"
First exchange-traded risk management tool specifically developed for the insurance industry by the Chicago Board of Trade as a way for the primary insurance company to offset its underwriting exposures. See also futures tied to reinsurance. These contracts are designed to provide the insurance company with a hedge against underwriting losses resulting from catastrophic occurrences. The futures contract is an agreement to buy or sell a commodity or financial instrument at a set price on a given date. The option permits the owner to decide whether or not to exercise the option to buy or sell the commodity or financial instrument by the stipulated exercise date. The insurance option trading is based on the loss ratio concept (losses incurred over a stipulated time period divided by premiums earned over the same time period). For example, assume an insurance company buys an option on the loss ratio that will fall within the range of 50% to 70%. Should losses fall within that range, the insurance company would then exercise the option and sell the contract, thereby enabling the company to make a profit on the option. This profit could then be used by the company to offset losses. Should the loss portion not fall within the 50% to 70% range, the option would expire at zero value.
Popular Insurance Terms
Presence of other contract (s) covering the same conditions. When more than one policy covers the exposure, each policy will pay an equal share of the loss. ...
Process of forming a large group of homogeneous lives that in order to allow the law of large numbers to operate, thereby projecting a probable rate of mortality or morbidity whose ...
Feature in a life insurance policy allowing a policyowner to freely assign (give, sell) a policy to another or institution. For example, in order to secure a loan, a bank asks to be ...
Employee's full entitlement, with no waiting period, to benefits under a pension or retirement plan. In the case of a contributory plan, there is immediate vesting of the employee's own ...
Assurance by the agent that the recommended insurance plan for the client is suitable for that client's specific needs. This assurance is derived from a careful analysis by the agent of the ...
Average earned monthly income (AEMI) for the tax year in which the insured wage earner has income interrupted or terminated because of illness, sickness, or accident. This AEMI is important ...
Type of term life insurance policy that has a face amount that increases to a predetermined sum and then decreases to zero at the termination point of the policy, while at the same time ...
Insurance coverage for pitfalls associated with travel. The coverage can be classified as follows: Trip Cancellation the travelers) must cancel the trip because of unforeseen circumstances ...
Employee of the insurance company who has the authority to appoint brokers on behalf of the insurance company. This supervisor has the objective and responsibility to sell the insurance ...
Have a question or comment?
We're here to help.