Derivatives
Definition of "Derivatives"
Securities that derive their value from other financial instruments that are used by the insurance company to hedge its bets on which direction the market is moving. For example, cattle futures are a simple derivative in that the cattle futures contract increases or decreases in value as future prices change for cows on the hoof. When insurance companies use derivatives, they are more likely to use them in association with currency and interest rate transactions as a means of protecting themselves against adverse moves in interest rates or foreign currency exchanges. This instrument provides a mechanism for hedging against the interest rate risks that are inherent within insurance products by pricing in that risk in advance and protecting against future negative occurrences.
Popular Insurance Terms
Sale of life insurance policies through vending machines. This method of distribution is generally limited to travel accident insurance, supplemental health or disability policies, or life ...
Coverage that exceeds the normal insurance capacity of an insurer or reinsurer. ...
Measurement of the response of the cash flow of an insurance company to various interest rate scenarios; for example, how rising interest rates will affect the number of life insurance ...
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Sum it takes to replace an insured's damaged or destroyed property with one of like kind and quality, equivalent to the actual cash value, minus physical depreciation (fair wear and tear) ...
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All insured losses paid in full. ...
Policy provision designed to restore an insured to his or her original financial position after a loss. The insured should neither profit nor be put at a monetary disadvantage by incurring ...
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