What does Basis Risk mean? Read on to discover the definition & meaning of the term Basis Risk - to help you better understand the language used in insurance policies.
The difference between an index and a specific portfolio of losses (relying upon that index) as the underlying basis for a hedge. For example, insurer A's loss portfolio will not be the same as the index used to calculate the price of the security purchased to hedge the loss portfolio. Basis risk results from an imperfect hedge.
We hope the you have a better understanding of the meaning of Basis Risk.