Catastrophe Insurance

Catastrophe insurance protects businesses and residences against natural disasters such as earthquakes, floods and hurricanes, and against man-made disasters such as terrorist attacks. These low-probability, high-cost events are generally excluded from standard hazard insurance policies, which makes catastrophe insurance necessary.

Catastrophe insurance is different from other types of insurance in that it is difficult to estimate the total potential cost of an insured loss, and a catastrophic event results in an extremely large number of claims being filed at the same time. This makes it difficult for catastrophe insurance issuers to effectively manage risk. Reinsurance and retrocession are used along with catastrophe insurance to manage catastrophe risk.

Different types of catastrophe insurance are available to cover various natural disasters and damage caused by terrorism. Homeowners insurance may contain certain types of coverages, but earthquakes and floods, for example, are typically excluded. Many homeowners policies cover only named perils, which can vary policy to policy and by insurance company. Even an “all perils” policy may exclude some events or contain specific policy limits, so you may not be fully insured for a major loss. That's where catastrophe insurance comes in. The coverage you should consider buying will mostly depend on the area in which you live.

Certain geographical areas are higher risk than others for events like hurricanes, tornadoes, windstorms or floods. Special catastrophe insurance is available for specific natural disasters, such as flood insurance, storm insurance for hurricanes and tornadoes, earthquake insurance and volcano insurance.

When a disaster strikes, you need to work closely with your insurance company to determine if the damage is covered under your homeowners or other disaster coverage. For example, if you live in a hurricane zone or flood plain, you may need to carry flood insurance on your residence. Flood insurance is available through a federal government program called the National Flood Insurance Program (NFIP). The government runs this program because the risks of flood insurance are typically too high for commercial carriers. Depending on your specific circumstances and the coverages, several scenarios could happen to you with flood insurance:

• If you bought flood insurance to cover your home and personal property, you'll receive compensation for both the damage to your residence and to your belongings.
• If you bought flood insurance only to cover your home, you won't receive compensation their personal belongings.
• Because NFIP requires everyone to wait 30 days before claims can be paid out, if you did not purchase your flood insurance well ahead of flood warnings, you may not get any compensation for flooding damages.  

Other types of catastrophe insurance might also require waiting periods before claims can be paid out on a disaster event. Consumers should check with their insurance agents to understand what the limitations are of their specific policies.