Insurance Derivatives

Insurance derivatives are financial contracts that allow parties to manage and transfer insurance-related risks without traditional policies. They function like insurance contracts traded on financial markets, enabling insurers, reinsurers, or investors to hedge against, or speculate on, events like natural disasters or large claims. For example, a company might buy a derivative to protect against losses from hurricanes, paying a premium upfront. If a hurricane occurs, the derivative pays out, helping the company cover damages. This approach enhances risk management, broadens access to insurance markets, and can improve financial stability.