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

Why Reserving is so important ?

 It is believed by many that insurers make profit from the difference between the money they receive in premiums, and the money they pay in claims.

This is true, but it is not the primary source of income for insurers, which perhaps causes the misguided notion that insurers make millions (and billions) of dollars in profit, at the expense of those people whose claims are denied.

Insurers are very liquid (or cash rich) businesses, owing to the regular volumes of cash they receive for policies they underwrite. Insurers then have to set aside some of this money to pay claims, the minimum amounts of which are set by law. This is called 'regulatory capital'. The rest they invest and that is the primary source of an insurer's income.

If reserves are set too high then too much regulatory capital is held up and this reduces the insurer's investment capital and their ability to make money. If reserves are set too low, then insurers may not be able to meet their regulatory capital requirements or satisfy claims.

Therefore, the importance of accurate reserving cannot be underestimated and having an #actuary on board makes the whole difference.

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