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.

Question

Quizplus · Accepted Answer

Catastrophe futures contracts are specifically designed to protect property-casualty insurers against the potential financial losses that can arise due to extreme and unpredictable natural disasters such as hurricanes. By purchasing these contracts, insurers can effectively hedge against the risk of large payouts that may result from such events, thereby safeguarding their financial stability and ability to continue operating in the market. They allow insurers to transfer some of the risk associated with catastrophic events to investors who are willing to assume that risk in exchange for a potential financial reward.

Catastrophe Futures Contracts