Catastrophic loss exposures
Catastrophe exposure brings a unique demand to the insurer capitalization. Moreover, it demands a distinctive risk management approach. The interaction of the different risks that face a particular insurance company is a crucial aspect that enables the company to determine the total capital requirement (Niehaus585). However, the occurrence of catastrophe poses a vast financial hazard to the insurer.
In Florida, hurricane catastrophe is one of the costly catastrophic exposure. Based on the properties insured in Florida, the 1992 hurricane Andrew caused damage of 25.9 billion US dollars. It was one of the most destructive hurricanes ever to hit the state during those times. However, 25 years later, the hurricane Irma struck in 2017, causing damage worthy 77.16 billion US dollars. Moreover, the 2005 Katrina hurricane struck damaging about 125 billion US dollars worthy properties (Cummins, and Richard 77). Therefore, hurricanes have been significant catastrophes in Florida.
Flood exposures also have become a problem in Florida. However, Michael and Carolyn (370) note that not many Americans in Florida purchase the insurance policy. The national flood insurance scheme estimates about 1.7 million in Florida are insured against flood. Moreover, that number is believed to be only half of the homeowners who live in areas regarded as high-risk flood areas.
Earthquake is also part of catastrophic loss exposure in Florida. While most renters’ insurance policies, condo, and home insurers do not cover loss resulting from earthquake, the cover can be bought as a separate or endorsement policy. Earthquake causes a lot of damage when they occur (Palm, and Risa2019). Moreover, it is a risk exposure that people needs insurance against.
Conclusion
Risks occur unexpectedly. However, with the insurance cover, the damages resulting from risks can be minimized. Catastrophic risks are one main challenge faced by insurers the difficulties of determining their effects. In Florida, there are hurricanes, floods and earthquake catastrophes that people need to insurer their properties against.
Work cited
Cummins, J. David, David Lalonde, and Richard D. Phillips. “The basis risk of catastrophic-loss index securities.” Journal of Financial Economics 71.1 (2004): 77-111.
Michel‐Kerjan, Erwann O., and Carolyn Kousky. “Come rain or shine: Evidence on flood insurance purchases in Florida.” Journal of Risk and Insurance 77.2 (2010): 369-397.
Niehaus, Greg. “The allocation of catastrophe risk.” Journal of Banking & Finance 26.2-3 (2002): 585-596.
Palm, Risa I. Earthquake insurance in California: Environmental policy and individual decision-making. Routledge, 2019.