Property Insurance and Catastrophes
November 30, 2007
Most people living in the US know that on October 21 wildfires broke out all across Southern California. These fires damaged thousands of structures and homes and resulted in massive evacuations. The cost of these fires is still being tallied but as of November 1, insured losses are estimated to exceed $1.5 billion, according to Risk Management Solutions (RMS).
As if that were not enough bad news, in June of this year wildfires around the Lake Tahoe area destroyed 254 homes. This fire resulted in losses of between $100 and $150 million, as estimated by RMS.
These are just two of the catastrophes that befell the US during the year, but they are an indication of the high cost nature can cause to homeowners and business owners alike.
How exactly does the insurance industry define the word catastrophe? In insurance industry lingo the word denotes a natural or man-made event that is abnormally severe and affects many people. There are numbers associated with it as well. By industry terms a catastrophe takes place when claims are expected to reach a particular dollar amount level which is currently set at $25 million, and more than a certain number of policyholders and insurance companies are affected.
In 2005, catastrophe losses came in at over $61 billion from twenty-four disasters. The final total for Hurricane Katrina losses are currently at $41 billion. This is from an estimated 1.75 million claims.
The hurricane season so far this year has been kind to the US. This is good news for insurance industry and for homeowners. The light weather has allowed most insurance companies a chance to recover some of their losses. These recovery funds are essential for paying out future claims.
But it is not all good news. It is expected that disaster losses along the eastern coast are likely to increase in future years. Some of this can be targeted at the increase of development in these areas. It only makes sense that the more homes and other structures in a high risk area the more damage potential. Some experts predict catastrophe losses may double every ten years or so because of increased residential and commercial development.
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.
Consumers may find it interesting that over the last two decades hurricanes and tropical storms made up 47.5 percent of total catastrophe losses. This was followed by tornado losses at 24.5 percent. Other events such as winter storms, earthquakes, flooding, etc made up the rest.
For most homeowners, the typical homeowner’s insurance policy will cover damages from windstorms, fire, hail, tornados, riots and other types of events such as theft. They also normally include provisions if the homeowner needs to live somewhere else while the property is being repaired or replaced.
Commercial property insurance will normally include all of the above as well as provisions to help get the business back in business.
Something that is not always known by homeowners and business owners is that flood and earthquake damage are excluded under homeowners and most commercial policies. These types of events can be covered if a separate policy is purchased that covers them. Many people who felt they would never need flood insurance were thrown into financial trouble when their homes were ravaged by recent floods.
Given the statistics and the random nature of catastrophes homeowners and business owners would be wise to review their current insurance policies to ensure that they have enough insurance and that they have the right kind of insurance. Many homeowners simply assume they have flood insurance when, in fact, they do not. Some of this confusion can be linked to the terminology.
If a pipe breaks within the insured home and floods the kitchen, living room, etc and repairs are needed, chance are very good that your policy will cover those expenses. On the other hand, if the river two miles away from the insured home overflows its banks and floods the home, chances are not good that a general insurance policy will cover that. You would need flood insurance to cover those costs.
Homeowners and business owners who are located along the eastern seaboard may find it very difficult or even impossible to get flood insurance now. Many companies who work that area of the nation are reducing or eliminating their risk potential and they are doing that by avoiding high risk policies in high risk areas of the country.
For those who can find these policies, they should expect to see much higher rates than what they have seen in the past. Those who cannot buy flood insurance locally are advised to check out the government programs that are now available for that type of protection