Although the CBOT health insurance futures contracts have been designed for the hedging use of insurers and reinsurers, it is important to note that these new futures contracts do not provide insurance coverage.
Users of health insurance futures contracts must post an initial margin, which acts like a performance bond.
In order to hedge against unexpected increases in claim costs, the company would buy, or go long, health insurance futures contracts, The appropriate number of contracts to buy may be found by dividing $10 million in premium by the $100,000 contract size times the ratio of hedge claims to claims completed in the period.
Several contracts, including health insurance futures contract, have been approved by the Commodities Futures Trading Commission (CFTC).
The health insurance futures contract prices claims in the small group market, details of which are provided below.
The underlying commodity or financial instrument of the health insurance futures contract is actually an index that tracks the insurance losses of a minimum of ten health insurance carriers, including Blue Cross and Blue Shield plans and commercial insurance companies, that report to a pool calculation manager.
These features of the health insurance futures contract -- a standardized contract, traded on an organized and regulated market with superior creditworthiness -- will permit insurers and reinsurers to hedge the systematic risk component of their insurance liabilities as related to the underlying index of health insurance policies.
Before providing a description of the health insurance futures contract, an examination of the timing of the introduction of this new contract may provide insight into its probability of use and success as a hedging instrument.
Two key considerations for the introduction of a health insurance futures contract in today's market are the existence of insufficient hedging alternatives and price variability.
The CBOT health insurance futures contract differs in many ways from insurance policy coverage.
The objective of the contract design of the CBOT health insurance futures contract is to create an index that reflects value for the industry.