Insurance Catastrophe Futures Contracts began trading on December 11, 1992 on the Chicago Board of Trade (CBOT). As in all commodity futures contract trading, a key objective is to increase liquidity of a market by bringing in new participants. These new participants, who are not professional consumers or producers of a commodity, increase liquidity of a market with their shorter term investment time horizon. For Insurance Catastrophe Futures the attraction of capital from non-traditional sources for insurance risk can create increased catastrophe capacity that is sorely needed in today’s insurance market.
In traditional insurance or reinsurance, the process of insuring against catastrophes is tedious requiring months of negotiations to conclude a sound agreement, In addition, the reversal of such agreements through commutation negotiations is equally tedious. Through the design of uniform insurance agreements, the CBOT attempts to develop a liquid market in which catastrophe risks can be easily assumedor transferred and in which non-traditional capital is attracted to insurance. For a futures contract to be successful, commodity contracts must possess key characteristics. These characteristics are discussed in this paper. And in the authot’s opinion, CBOT insurance contracts in their current form do not possess characteristics necessary for success.
Consequently, the insurance futures contracts have provided little additional capacity to the insurance catastrophe market and have not altered in a meaningful way negotiations prevalent in the catastrophe market, There may be some hope for success if certain structural changes takeplace in the reinsurance market.
