Insurance Derivative

A A A

DEFINITION

A financial instrument that derives its value from an underlying insurance index or the characteristics of an event related to insurance. Insurance derivatives are useful for insurance companies that want to hedge their exposure to catastrophic losses due to exceptional events, such as earthquakes or hurricanes.

INVESTOPEDIA EXPLAINS

Unlike financial derivatives, which typically use marketable securities as their underlying assets, insurance derivatives base their value on a predetermined insurance-related statistic. For example, an insurance derivative could offer a cash payout to its owner if a specific index of hurricane losses reached a target level. This would protect an insurance company from catastrophic losses if an exceptional hurricane caused unforeseen amounts of damage.


RELATED TERMS
  1. Financial Analysis

    The process of evaluating businesses, projects, budgets and other finance-related ...
  2. Risk Analysis

    The study of the underlying uncertainty of a given course of action. Risk analysis ...
  3. Act Of God Bond

    A bond issued by an insurance company, linking principal and interest to a company's ...
  4. Catastrophe Bond - CAT

    A high-yield debt instrument that is usually insurance linked and meant to raise ...
  5. Reinsurance

    The practice of insurers transferring portions of risk portfolios to other parties ...
  6. Insurance

    A contract (policy) in which an individual or entity receives financial protection ...
  7. Casualty Insurance

    A broad category of coverage against loss of property, damage or other liabilities. ...
  8. Reinsurance Sidecar

    A limited purpose company created to work in tandem with insurance companies. ...
  9. Reinsurer

    A company that provides financial protection to insurance companies.
  10. Pension Risk Transfer

    When a defined benefit pension provider offloads some or all of the plan’s ...
Related Articles
  1. An Introduction To Structured Products
    Options & Futures

    An Introduction To Structured Products

  2. The Barnyard Basics Of Derivatives
    Investing Basics

    The Barnyard Basics Of Derivatives

  3. Are Derivatives A Disaster Waiting To ...
    Options & Futures

    Are Derivatives A Disaster Waiting To ...

  4. How Companies Use Derivatives To Hedge ...
    Active Trading

    How Companies Use Derivatives To Hedge ...

  5. 4 Ways To Value A Real Estate Rental ...
    Home & Auto

    4 Ways To Value A Real Estate Rental ...

  6. Curious About Stock Index Futures? Read ...
    Options & Futures

    Curious About Stock Index Futures? Read ...

  7. 6 Good Reasons To Get Renter's Insurance
    Insurance

    6 Good Reasons To Get Renter's Insurance

  8. 5 Mistakes That Make House Flipping ...
    Home & Auto

    5 Mistakes That Make House Flipping ...

  9. How to Trade Futures Contracts
    Options & Futures

    How to Trade Futures Contracts

  10. How Cash Value Builds In A Life Insurance ...
    Insurance

    How Cash Value Builds In A Life Insurance ...

comments powered by Disqus
Hot Definitions
  1. Cash and Carry Transaction

    A type of transaction in the futures market in which the cash or spot price of a commodity is below the futures contract price. Cash and carry transactions are considered arbitrage transactions.
  2. Amplitude

    The difference in price from the midpoint of a trough to the midpoint of a peak of a security. Amplitude is positive when calculating a bullish retracement (when calculating from trough to peak) and negative when calculating a bearish retracement (when calculating from peak to trough).
  3. Ascending Triangle

    A bullish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs.
  4. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  5. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  6. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
Trading Center