The Chicago Board of Trade Friday will unveil a new contract designed to assume some of the risk for companies that make their money by taking risks.
Catastrophic insurance futures and options to hedge underwriting risk associated with major disasters are scheduled to be launched by the end of this year after approval by federal regulators.
While the exchange plans to also list homeowners insurance futures by the end of the year and a medical insurance contract next year, the insurance industry has shown more interest in the catastrophic futures, according to CBOT spokesman David Prosperi.
The CBOT plans to trade four different futures and options products based on quarterly insured catastrophic losses nationwide and in three regions-Eastern, Midwestern and Western. The price will reflect the market`s expectation of a quarter`s catastrophic loss in relation to the same quarter`s estimated property premium.
As severe catastrophes occur, or as their frequency increases, the futures price is likely to increase, the exchange said.
But if the quarter progresses with fewer than expected losses, the futures price could fall.
Catastrophic losses will be based on a large sample of reported incurred losses for a quarter caused by wind, hail, earthquake, riot or flood. The data will be calculated by the Insurance Services Office, which collects claims-loss data from companies representing about 85 percent of the industry.
According to the exchange, insurers would buy futures on the expectation that higher-than-forecast catastrophic losses will generate payments from the futures market. However, lower-than-expected losses will require the insurer to make payments into the futures market.
Assuming trading begins in December, the CBOT will list the national and three regional contracts for March, June, September and December 1993.
”Once again, we are breaking new ground with our new complex of insurance futures,” said Richard Sandor, a CBOT director. ”While innovative contracts such as these take time to be successful, the insurance industry has recognized the need for such a product to offset underwriting risk.”
