Actuarially Fair Value

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Actuarially fair value is the price at which the expected payout of a contract equals its cost, so the expected profit to both sides is zero before fees and expenses. For a binary contract this is simply the true probability of the event, meaning an event with a genuine 10% annual chance has an actuarially fair price of $0.10. Insurance and reinsurance are generally sold above actuarially fair value because the premium must also cover the seller’s capital, overhead and profit, and hedgers are often willing to pay that difference in exchange for protection against outcomes they cannot absorb.

Hurricane Forecast Contracts as Efficient Reinsurance

Bundling “NO” Hurricane Landfall Forecast Contracts to Reduce Downside Risk

Hurricane Forecast Contracts as a Diversifying Asset in an Investment Portfolio

Disaster Insurance Applications of Forecast Contracts

How Forecast Contracts Can Help Mitigate Florida’s Insurance Crisis

Forecast Contracts as a Tool to Manage Non-Catastrophic Weather Risk