Health Insurance Futures
Definition of "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
The term mutually exclusive defines an instance when the occurrence of a specific event makes the emergence of another event impossible. Then, two or more things can be described as ...
Endorsement to a fidelity bond or surety bond to cover losses that occurred after lapse of the discovery period of the previous bond. Coverage is limited to the amount provided by the ...
Endorsement to a property insurance policy providing all risks coverage for insured property. Excluded properties include residences, farms, and manufacturing properties. This endorsement ...
Approach in pension plan funding under which a separate account is maintained for comparing actual contributions to the plan with the minimum contributions required to meet future employee ...
Coverage in the event of property damage or destruction resulting from wrongful installation of equipment. ...
Report that an insurance company must file annually with the State Insurance Commissioner in each state in which it does business. The statement shows the current status of reserves, ...
Coverage for direct or indirect property loss that can be analyzed under the following headings: Peril a particular peril may be included or excluded. For example, the Standard Fire Policy ...
Amount of the insurance company's liabilities for claims that have not been settled. If this reserve increases significantly in relation to the company's surplus, the risk is greater for ...
Means of borrowing at no charge by a policyowner under universal life insurance policies. ...
Have a question or comment?
We're here to help.