Jan/Feb 2016 Into the Futures

In early 1991, the pricing of futures contracts was virtually absent from our actuarial literature. The only such reference in the CAS research database prior to 1991 is a 1987 article by Robert A. Bailey, “Controlling the Cycle,” but that was actually an ironic, tongue-in-cheek article about cattle futures whose purpose was to suggest that the insurance pricing cycles should not be regulated. Then in February 1991, Richard E. Sherman broke the ice with an article for the AR titled “Actuaries and Insurance Futures.” The topic rapidly gained interest, and now a search of the CAS research database under the word “futures” turns up 21 articles. Mr. Sherman’s article explained:

The Chicago Board of Trade has proposed the introduction of insurance futures as a new type of contract which may be exchanged on its trading floor in the near future. So far, such contracts have been proposed for automobile collision, health, homeowners and commercial property damage policies.

Actuarial Review, February 1991.

Of what import is this development to casualty actuaries? Will this innovation come into being without providing significant opportunities for casualty actuaries to apply their analytical skills and their ability to assess risks related to insurance? That could well occur unless we take an active role in developing an understanding of this new type of contract and in seeking opportunities to interact with senior management on them.

Mr. Sherman continued to provide the reader with an overview of futures contracts and advice for further study. He explained how the insurance futures contracts would work, identified who the buyers and sellers would be and recommended a book, The Stock Options Manual, which he found to be useful.  He also discussed the Black-Scholes model as a pricing tool for futures contracts, and concluded with discussions of hedging and market prices for these contracts.

Walter Wright served as AR editor in chief from 1998 to 2002 and as AR managing editor from 1993-1998. He retired from Oliver Wyman in 2008.