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
Same as term Expiration File: agents' records showing when clients' policies expire. ...
Restoration of a policy that has lapsed because of nonpayment of premiums after the grace period has expired. In life insurance the reinstatement time period is three years from the premium ...
Branch office of an insurance company's home office that markets, underwrites, and services the company's lines of business within a specified geographical area. ...
Policy combining features Of UNIVERSAL LIFE INSURANCE and VARIABLE LIFE INSURANCE in that excess interest credited to the cash value account depends on investment results of separate ...
Reinsurance: surplus reinsurance contracts under which the agreement between an insurer and a re insurer is based on the ceding company's line guide, such that the amount re insured is ...
Policy of variable universal life insurance (VUL) under which, if the accumulation of the premiums paid at any point in time (minus policy loans, and withdrawals) equals or exceeds the ...
Coverage against hail damage to crops. Coverage is on a proportionate basis; that is, in the event of loss, a farmer will recover an amount based on the ratio of the damaged part of a crop ...
One premium payment made to fund the future benefits of a group of employees. ...
Life insurance policy provision stating that after the death of an insured, the proceeds from a policy are not immediately paid to the primary beneficiary; instead, they are delayed for a ...

Have a question or comment?
We're here to help.