22-81 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 primarily designed to help property-casualty insurers manage their exposure to extreme losses resulting from natural disasters. They can provide a hedge against losses from events such as hurricanes or earthquakes, which can cause significant damage to property and result in high claims payouts. These contracts are typically settled based on a formula that takes into account the severity of the event and the extent of the losses incurred by the insurer.

22-81 Catastrophe Futures Contracts