In insurance, a catastrophe hazard is a potential risk that would cause many policyholders to claim on their policies simultaneously.
Catastrophe Hazard Details
Catastrophes, which arise from natural disasters such as earthquakes, floods, and volcanic eruptions, can cause enormous fiscal stress to insurance companies and entire countries. Catastrophes occur rarely and are difficult to foresee and, because the extent of the damage they will cause is unknown, hard to budget for. Both countries and private insurance companies can find that they have insufficient funds to cover immediate needs in the event of a catastrophe.
The World Bank runs the Disaster Risk Finance and Insurance (DRFI) Program to help countries manage the cost of a disaster and respond more quickly to mitigate its risks. Although some question the science behind global warming, it is undoubtedly true that weather-related disasters are increasing in frequency. Unfortunately, the most vulnerable regions often cannot afford to pay for the consequences of a natural disaster. Nevertheless, there are advances in mitigation programs at an international level, such as stricter building codes, early warning systems, improvements in infrastructure, and training in disaster relief management to help mitigate the consequences of such disasters.
Real-World Example of Catastrophe Hazard
In August 2005, Katrina—a category five hurricane—sped across the Gulf of Mexico and smashed into southeast Louisiana and Mississippi. Katrina caused more than 1,800 deaths and some $125 billion worth of damage.
An article titled 'Hurricane Katrina: The Numbers Tell Their Own Story' by Stephanie K. Jones and published in 'Insurance Journal' on August 26th, 2015, states that in the 25 years before 2005, insurers in Louisiana made $1 billion in profit from $13 billion worth of homeowners' insurance. Katrina cost the insurers $8 billion just in home insurance in Louisiana alone; in total, Katrina cost insurers in the United States around $41 billion. Even so, some people who thought that they were insured discovered that ordinary insurance policies often do not cover catastrophe hazards. A policyholder may need to purchase additional, often expensive, insurance to cover catastrophes.
In the aftermath of the 2005 hurricane season, many insurance companies ceased trading in Louisiana. Policymakers in the state focused on hazard mitigation measures and sought to increase the number of insurance companies that operated there to spread the financial risk amongst more insurers.
Catastrophe vs. Natural or Man-Made Disaster
A catastrophe is an event for which there was no adequate forecast. There is not enough time, and, perhaps, no plan, to evacuate people from the affected area. Infrastructure is not sufficiently developed or is overwhelmed, and communications break down.
A natural disaster is a severe weather or geological event that impacts a large area and affects many people. In contrast, a man-made disaster is, generally, the result of human error. The Chernobyl incident stands as a good example. At Chernobyl, a relatively rapid reaction averted a catastrophe.
A natural disaster is a potential catastrophe if the affected area is not prepared for it. Because of this lack of preparation, the event's consequences are more severe than they otherwise would have been.