Question

. Explain three procedures which insurance companies may modify when handling catastrophic losses.

Answer 1

Companies take different approaches to managing how much of a particular product or aggregate

catastrophe exposure it will write in any given area.8 However, there are common characteristics in all

good catastrophe risk management programs. For example, a company that opts to write equal

amounts of product in two distinct locations covering a specific peril (e.g.,earthquake) will have more

capacity than a company that writes double that exposure in one location.

In addition to managing geographical distributions, companies can purchase reinsurance that

transfers a portion of the risk to a reinsurer. This does not reduce the company’s direct obligation to

the policyholder. The company promises to pay all claims irrespective of any reimbursement from the

reinsurer. Risk transfer mechanisms are discussed later in this monograph.

Expanding on the above, the company may achieve its general objectives by processes such as:

■ counterbalancing existing risk accumulation with targeted growth

■ limiting the accumulation using quotas or a moratorium on new business

■ adopting minimum deductibles, reducing exposure and encouraging preventive mitigation

■ reviewing coverage provisions to limit the potential for adverse coverage determinations

after a catastrophe

■ excluding coverage for certain types of catastrophic perils

■ limiting coverage for property that is prone to catastrophic damage

Note: Answer has been provided with reference to few websites and research papers.