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Catastrophes: Insurance Issues
Catastrophes: Insurance Issues
The term “catastrophe” in the property insurance industry denotes a natural or
man-made disaster that is unusually severe. An event is designated a catastrophe
by the industry when claims are expected to reach a certain dollar threshold,
currently set at $25 million, and more than a certain number of policyholders
and insurance companies are affected.
The magnitude of the damage caused by Katrina and the potential damage
Hurricane Rita might have caused had it not weakened from an intense
Category 5 hurricane has triggered a reexamination, not just among insurers
and reinsurers but also among public policy and political leaders, of how the
United States deals with the financial consequences of such massive property
damage and personal loss.
Disaster losses along the coast are likely to escalate in the coming years,
in part because of huge increases in development. One catastrophe modeling
company predicts that catastrophe losses will double every decade or so due
to growing residential and commercial density and more expensive buildings.
Data from the Census Bureau, collected by USA Today, show that in 2006, 34.9
million people were seriously threatened by Atlantic hurricanes, compared with
10.2 million in 1950. Before the 2005 hurricane season, Hurricane Andrew
ranked as the single most costly U.S. natural disaster.
Man-made catastrophes such as the attacks on the World Trade Center
can also cause huge losses. The attacks led Congress to pass the Terrorism Risk
Insurance Act (TRIA) in November 2002. Since then, TRIA has been reauthorized
twice. The latest reauthorization, passed at the end of 2007, extends the law to
2014. TRIA provides a federal backstop for commercial insurance losses from
terrorist acts, making it easier for insurers to calculate their maximum losses
for such a catastrophe and thus to underwrite the coverage, see the topic on
Terrorism Risk and Insurance.
The typical homeowners insurance policy covers damage from a fire,
windstorms, hail, riots and explosions—as well as other types of loss such as
theft and the cost of living elsewhere while the structure is being repaired or
rebuilt after being damaged. Commercial property insurance policies generally
cover the same causes of loss with some variation, depending on the coverages
selected. Flood and earthquake damage are excluded under homeowners policies—separate
policies are available—but are covered under the comprehensive
portion of the standard auto policy, which more than 75 percent of drivers who
buy auto liability insurance purchase.
The insurance industry tracks catastrophes to monitor claim costs, assign-
32 I.I.I. Insurance Handbook www.iii.org/insurancehandbook