I. What is a Catastrophe? or property and casualty insurers, catastrophes are infrequent events that cause severe loss, injury or property damage to a large population of exposures.1 While the term is most often associated with natural events (e.g., earthquakes, floods or hurricanes), it can also be used when there is concentrated or widespread damage from man-made disasters (e.g., fires, explosion, pollution or nuclear fallout) . Whether losses arising out of an event are defined as a catastrophe depends on the size of the loss to the company or to the entire industry. Property Claim Services (PCS), a unit of the Insurance Services Office, Inc., analyzes catastrophes based on their impact on the industry as a whole. PCS monitors industry loss reports and assigns a catastrophe number to an event if direct insured losses to property exceed $25 million and it affects a significant number of insureds and insurance companies. In addition, many individual insurers establish company thresholds for defining a catastrophic loss. An insurance company may utilize internal criteria to determine whether an event is a catastrophe as it relates to its specific book of business even if the event has not been labeled as a catastrophe for the industry as a whole. Not all catastrophes are covered by property and casualty insurers. Some may not be privately insured because of difficulties in quantifying and pricing the hazard (e.g., nuclear hazard). In addition, catastrophes that could be subject to adverse selection may be specifically excluded from coverage (e.g., flood). Frequently, if the insurance industry does not provide coverage for a catastrophic peril a governmental program or facility may be available.2
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1 The term “exposures� refers to units for measuring the size of an insurance portfolio, such as the number of policies, number of property locations, aggregated coverage amounts, or other alternative measures. 2 Appendix A discusses the extent to which traditional insurance products cover catastrophe perils. Appendix B outlines various governmental programs that protect individuals against catastrophic risks.
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