Natural disasters have become increasingly more common. As a homeowner, what do these events and their related costs mean to you?
Earthquakes, tsunamis, tidal waves, hurricanes (like the recent Hurricane Matthew) and tornadoes are considered catastrophes and cost insurance companies millions of dollars in claims settlements. Insurance companies purchase their own insurance coverage to protect themselves from these types of occurrences.
When forecasting how much money they need to pay out on future claims, insurance companies rely on Information provided to them by actuarial studies that establish expected losses. When losses exceed these estimations, the funds in the reserves get depleted. These claims funds must be replenished to develop a new reserve for any future disasters. The more the disasters, the faster the funds deplete.
Actuaries look at the occurrences that have happened in past years and establish the amounts required to keep the reserves at maximum to pay out future claims. These forecasts are then used to establish the premiums that customers will pay.
Effects on Insurance Companies
Not only are insurance premiums affected by unexpected catastrophes – virtually every phase of an insurance companies operations are affected. Insurance companies must respond quickly to their policyholders.
This means more than just paying out claims. Internal and external adjusters are assigned, third party restoration and repair firms are retained, and policyholders must be reassured that they will be taken care of. Resources in the location of the loss become scarce due to high demand, and additional resources are often brought in from other locations that are unaffected by the event. This often costs the companies more dollars than expected.
This also holds true for large non-catastrophic losses. When unexpected large and/or catastrophic losses occur, reserve funds are depleted and administration costs are increased. Insurance companies must then review the pricing of their policies – that is, how much premium they will charge.
Effects on Policyholders and Premiums
Catastrophic incidents affect all insurance premiums whether the incident happened in the policyholder’s area or in another part of the country. The Canadian insurance market is somewhat
stronger than other markets because of the cautious and conservative regulators. Most large insurance companies, however, are international and reflect the cost of events that seemingly have no direct impact on our daily lives.
Learn to Protect Yourself
As a property owner, it is important to be aware of the risks that natural disasters may cause to your home. Know your area! For example, to further protect your home from fire, you can purchase fire resistant shingles or better plan your greenery that surrounds your home.