Catastrophe futures contracts
A)are designed to protect life insurance companies from the effects of natural disasters in which large numbers of lives are lost.
B)are designed to protect property-casualty insurers against the extreme losses that can occur in hurricanes.
C)are designed to hedge insurance companies from liability law suits.
D)provide a payoff when the actual loss ratio is less than the expected loss ratio.
E)provide a payoff to the seller of the contract that is equal to the loss ratio times the nominal value of the contract.

Question

Quizplus · Accepted Answer

Catastrophe futures contracts are designed to protect property-casualty insurers against extreme losses that can occur in natural disasters such as hurricanes, earthquakes, and floods. These contracts allow insurers to transfer some of the risk of catastrophic events to investors who are willing to take on that risk in exchange for a potential profit. The contracts pay out if the losses from a catastrophic event exceed a certain threshold. This helps insurance companies to better manage their risk and avoid insolvency in the event of a major disaster.

Catastrophe Futures Contracts