Option Trader’s Hedge Fund – A Business Framework for Trading Equity and Index Options : [PDF Download]

PDF Title:Option Trader’s Hedge Fund
Author:Mark Sebastian & Dennis A. Chen
Language:English
Publisher:FT Press
Format:PDF
Total Page:240 Pages
PDF Size:12.40 MB
PDF Link:Read and Download

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“The most important function in the insurance company is underwriting. Underwriters select and price risk. They make sure that actuarially the policies written are expected to have a positive return.

For example, in a life insurance policy, the underwriting unit is the one that figures out how long a 40-year-old male, nonsmoker, with a clean bill of health is expected to live. Then with this information, they figure out how much to price the premium for the life insurance for this segment of the population in order to have a positive expected return.

If the underwriting unit is wrong, the loss ratio will be higher than expected, and the company will lose money. They will pay out more than they collect in premiums. This sounds like a simple business, but it is not. The company estimates the probability of losses to a segment it wants to insure.

Next, based on those estimates, it prices the premium needed to make a profit. Then, it sells the insurance policies. It collects the premiums and invests them while it waits for the policy to expire or the event to happen. Finally, if the event happens it pays out the claim, or if the event does not happen it pockets the premiums as profits.”

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