Appreciate your comments Cap.

The write-up should reflect a little bit of satire and much of boredom. :) But as I thought more about the concept of insurance in political process, economy and myriad of other things, it only got more fascinating.

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I take it back that there are no insurance policies to ensure elections yet. In fact, if I may say, the concept of insurance in political systems is well beyond its rudimentary stage, thanks to derivative markets. Since this market is quite developed in the US, I will mostly focus on how US politicians can ‘purchase’ insurance against their loss in elections.

There are several websites where you can bet on which candidate is going to win each party’s nomination. Although people there, I assume, bet on candidates primarily for speculative purposes, there is no reason why candidates can not insure their loss by betting against themselves. You speculate or  insure by means of political futures

By buying or selling political futures, you enter into a contract with an obligation to buy or sell the underlying asset (standardized as indexes so that the settlement will be in cash at a later date) at a specified price in the future. For example, if I buy a 1 contact of X future for $60 which expires 6 months from now, then all it means is that regardless of the price of 1 contract of X 6 months from now, I am obligated to buy X at $60. If the price increases in the next months, I make profit, and if the price decreases, I bear loss.

Each major candidate has his/her own index just like Dow Jones or S&P has its own. Change in index tells us about the performance of the ‘asset’ (candidates) attached to the index. So, if Dow Jones index today was up +300 from yesterday’s close, it tells that there was some good news in the market today. Similarly, if Clinton index goes up by +30 today, then it could mean that the latest CNN/Gallup poll showed Clinton to be leading Obama in Iowa by double digits. Depending on whether your predictions come true or not, you make or lose money.

Let’s say the current index for Clinton is 60 and Obama 40, the sum of which should be 100 at all times (assuming there are only two candidates and only one candidate wins the nominations). Each contract has a notional value of $10 times the value of the index. So, one Clinton contract costs $600 (60*10) and one Obama contract costs $400 (40*10). If I am betting that Clinton will win the primary, then I buy Clinton contracts. If the Clinton index today was up by +4, then I earn $40 (10*4) at the end of the day. The market is settled daily until the expiration date, which in this case, would be the last primary election day. On the expiration date, if Clinton takes the nomination, $600 invested in Clinton contract becomes $1000 and $400 invested in Obama becomes 0. It is obvious that the more we head closer to the nomination date, the surer we become of who is going to take the nomination. So, if it becomes clear that Clinton has won the nomination then the Clinton index would be very close to 100 and Obama would be very close to 0. And if you still think that Obama will win and you buy Obama contracts, and by some miracle he does, then you earn close to $1000 for an insignificant amount you invested earlier. Depending on what your prediction is, you make or lose money.

If I am Obama, and I have a feeling that Clinton is going to take the nomination, then, to insure myself, I buy Clinton futures. If I lose the nomination I still get much of the cash back (depending on how much I have invested) since my predictions come true, and if I win the nomination then that loss should be insignificant anyway. Moreover, that loss amount is the cost of my insurance; I have to pay ‘premiums’ for purchasing insurance. (Of courses, there could be campaign finance rules and regulations that might restrict the candidates from investing in risky market). So, this way, by buying Clinton futures, Obama can insure himself against his loss in the nomination process and so can Clinton. Similarly, each political party can insure itself in the presidential elections too by buying opposing party’s futures.

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*I am not sure how the indexes are calculated for each candidate, but I believe the idea is similar. The indexes mentioned above are not real and only used to demonstrate a point.