Derivatives: Forwards vs Futures

  Before understanding what is derivative, let’s learn what is underlying asset. Underlying asset: Underlying asset can be real asset such as commodities, gold etc or financial assets such as index, interest rates etc. Derivatives: ·         These are financial instruments who value depend upon or is derived from some underlying asset. ·         A derivative does not have its own physical existence, it emerges out of contract between the buyer and seller of derivative instrument. ·         Its value depends upon the value of underlying asset. Hence returns from derivative instruments are linked to returns from underlying assets. ·         The most common underlying assets are stocks, bonds, commodities, market indices and currencies. ·         Derivatives are mainly used to control risks. They can be used to reduce risks (a process known as hedging) or to increase risks in order to enhance returns (speculation)   Classification of Derivatives: ·         Broadly we c

Do you know the types of risk faced by a General Insurance company ?

 Better to understand some types of General Insurance product first.

  • Third party Insurance ( You are driving a car and caused an accident then third party will be indemnified)
  • Aviation insurance ( related to Aeroplanes)
  • Marine Insurance ( related to ships)
  • Travel Insurance ( related to your travel journey)
  • Cyber Risk Insurance (related to cyber attacks)
  • Commercial property insurance (related to Fire in the house or any damage)
  • Contents insurance (related to moveable property such as contents in your house : theft risk)
  • and many more................

Some of the specific risks we are discussing today:

Motor Insurance

Claim frequencies being higher than expected
    • Society becoming more aware about claiming under insurance so they are now more litigous
    • Rainy season which caused a lot of motor accident
    • Flood, storms, riots
    • or your Policy document wording is loose that you (i.e. Insurer) has to pay claims that you has not intend to do. (So, what happens is that you created a document regarding terms and conditions but those T&C are misunderstood by policyholder then it is a big risk)
(Always remember that whenever talk about risks, think about its amount (i.e. severity) and frequency (i.e. likelihood)

Claim severity being higher than expected
    • It can be due to let's say court award inflation being higher than expected
    • Any catastrophes, accumulations happen
    • Catastrophe mean an incident which is defined in a policy document such as Flood and that caused a big loss within a short period of time

General risks

    • Errors in Pricing
    • Errors in Reserving
    • Wrong Data used to model the parameters
    • Liquidity risk such as major event happened but your company does not have enough financial resources as of now to pay immediately
    • Credit risk such as default by a third party
    • Expenses being higher than expected
    • Withdrawals being higher than expected
    • Moral Hazard
    • Fraud
    • Anti-selection
  • and many more..............

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