Question

In: Finance

Individual insurance companies usually do not provide insurance products for natural disasters (e.g., flood, earthquake, wildfire)....

Individual insurance companies usually do not provide insurance products for natural disasters (e.g., flood, earthquake, wildfire).
(1). Could you please explain the rationale behind this missing private insurance market?
(2). Are there any public insurance programs against these disasters? That is, can people buy insurance against natural disasters from the government programs? Can you introduce one of such programs, focusing on the key features including, but not limited to: the underwriting process, the determinants of insurance premium, the coverage, and the claim process.

Solutions

Expert Solution

The rationale behind natural disasters not included under insurance is because of 2 reasons:

a) including natural disasters will create the coverage to many kind of damages like cyclone, earthquake, floods, thundering storm and many more. This will be costly to insurance companies because the claim percentage will increase.

b) imagine a earthquake occuring in a city. The damage caused will be huge and almost everyone gets impacted. Such an impact would create many claims and overall spending of insurance companies.

However, some insurance companies do provide insurance for natural disasters like car insurance and crop insurance companies. A crop insurance company provides flood insurance through National Flood Insurance program. Such insurance companies provide insurance on natural disasters.

In terms of premium cost would be mostly on the area. How frequently the area is effected by flood would be proportionate to the premium. Similarly, claim process would be accordingly difficult. The underwriting process will detail the terms and conditions of coverage. It doesn't include all natural disasters but few like floods, heavy rainfall.


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