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
One-year coverage that is renewable at the end of each year. Since the group plan is subject to experience rating, the premium rate upon renewal is based on such factors as the loss record ...
Bona fide organization that purchases insurance on a group basis on behalf of members. However, a group cannot be formed for the purpose of purchasing insurance since adverse selection ...
In many property insurance policies, a requirement that the insured carry insurance as a percentage of the total monetary value of the insured property. If this percentage is not carried, ...
Amount, not in excess of $10,000 per year, given to each of an unlimited number of donees free of federal estate tax and gift tax. Each individual can give up to $10,000 to any one donee, ...
Financial incentives credited to the policy to encourage the policyowner to keep the policy in force. The incentives may be utilized by: (1) applying them to the policy cash value after a ...
Canadian retirement plan much like U.S. individual retirement account (IRA). Here, an employee can contribute on a tax deductible basis C $3500 each year as a member of an employer pension ...
Transfer of highly individualized loss exposures that is not based on the usual pooling principles of insurance such as risk identification and classification selection. Rather than setting ...
Rules of conduct and commissions paid to agents. For example, under the rules of conduct agents may be required to submit all of their business to only that agency. The contract also lists ...
Provision for coverage for buildings and personal property within the simplified commercial lines portfolio policy (sclp). The buildings and personal property coverage may be classified in ...
Have a question or comment?
We're here to help.