Natural disasters and insurance

Insurance industry outlook

Disasters have an impact on the insurance industry

Natural disasters do not only affect a certain type of person; they also have an impact on the insurance industry. It can be difficult for people to see the impact that catastrophic events have on insurers due to a general disdain for the industry as a whole. The most common response an insurer has to natural disasters, however, in the long run it does raise rates. This is something that typically attracts a great deal of attention from policyholders of all kinds. Many people question why insurers raise rates in the wake of a hurricane or major earthquake. Some even go so far as to suggest that raising rates is all about generating more profit. For insurers, however, it’s more about survival than it is about business.Insurance industry outlook

Insurance companies do, indeed, suffer a serious financial blow when it comes to natural disaster. The severity of this financial impact is determined by the damage caused by the disaster itself. During the 2012 Colorado wildfires, some 87,000 acres of land was burned and the fires destroyed 259 homes and displaced thousands of people. Several other fires hit the state in the same year, causing damage estimated in the billions of dollars. The majority of homeowners affected by the disaster had insurance protection against fire damage, which means that the cost of these disasters was shouldered by the insurance industry.

In 2012, another major natural disaster put financial strain on the insurance industry. Hurricane Sandy struck the East Coast of the United States near the end of the year, causing some $68 billion in damage. Insurers worked to resolve claims relating to the disaster, even though many were not liable to provide benefits for flood damage.

Reinsurance plays a role in higher rates

The impact of natural disasters is not only seen in the insurance industry itself. The reinsurance industry exists to provide insurance companies with insurance against catastrophic events. When a natural disaster strikes, the reinsurance industry generally raises rates for its coverage. This puts further financial strain on insurance companies, which forces them to raise rates as well. Without raising rates, insurers are not able to balance the cost of catastrophic events and, therefore, would be unable to pay claims. Higher rates mean more of a financial cushion for insurers, and this cushion can actually be a beneficial thing for policyholders as insurance companies play a major role in disaster recovery.

editors choiceThere are, of course, issues that exist when it comes to the matter of higher insurance rates and how rates are affected by natural disasters. Florida, for instance, is considered to be a very risky market by the U.S. insurance industry due to the number of natural disasters it has seen in the past. The problem, however, is that Florida has managed to avoid any significant disaster for the past several years, yet homeowners insurance prices continue to climb. The majority of homeowners coverage in the state comes from a state-run organization that has been mismanaged for the past several years. This situation is quite common throughout the world, and poorly managed companies have helped stoke the negative stigma that has come to surround the insurance industry.

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