What Is Catastrophe Insurance?
Catastrophe insurance protects businesses and residences against natural disasters such as earthquakes, floods, and hurricanes, and against human-made disasters such as a riot or terrorist attack. These low-probability, high-cost events are generally excluded from standard homeowners insurance policies.
- Though they both deal with protecting a home, catastrophe and homeowners insurance are technically two different types of coverage.
- Catastrophe insurance protects businesses and residences against natural disasters—such as earthquakes and floods—and against man-made disasters.
- Special catastrophe insurance is available for specific natural disasters, such as flood insurance, storm insurance for hurricanes and tornadoes, earthquake insurance, and volcano insurance.
- Flood insurance is unique in that it is available through the federal government.
How Catastrophe Insurance Works
Homeowners insurance may contain certain types of coverages, but loss or damage resulting from certain types of events are typically excluded. As a rule of thumb, damage and destruction due to earth movement (such as landslides, mudslides, earthquakes, and sinkholes) or floods (due to storms, typhoons, tsunamis, or hurricanes) usually are not covered by homeowners insurance.
Many homeowners policies cover only named perils, which can vary policy to policy and by the insurance company. Even an "all perils" policy may exclude some events or contain specific policy limits, so you may not be fully insured for a major loss. That's where catastrophe insurance comes in.
Different types of catastrophe insurance are available to cover the damage done by natural disasters and by man-made events. Special catastrophe insurance is available for specific natural disasters, such as flood insurance, storm insurance for hurricanes and tornadoes, earthquake insurance, and volcano insurance.
Catastrophe insurance is different from other types of insurance from a business standpoint, as well. It is difficult to estimate the total potential exposure to, and cost of, an insured loss, especially since a catastrophic event often results in an extremely large number of claims being filed at the same time. This makes it challenging for catastrophe insurance issuers to manage risk effectively. Reinsurance and retrocession are used by issuers to manage catastrophe risk arising from their coverage of catastrophic events.
Estimated global total economic losses from natural and man-made disasters in 2019, according to insurer Swiss Re Institute.
Often, the coverage you should consider buying will mostly depend on the place in which you live. Certain geographical areas are higher risk than others for events such as hurricanes, tornadoes, windstorms, wildfires, or floods. If you live an area that's vulnerable to aquatic mishaps, such as a hurricane zone or flood plain, you may need to carry flood insurance on your residence. Flood insurance is available through the federal government's National Flood Insurance Program (NFIP).
The government runs this program because the risks of flood insurance are typically too high for commercial carriers. Depending on your specific circumstances and the coverages, several scenarios could happen to you with flood insurance:
- If you bought flood insurance to cover your home and personal property, you'll receive compensation for both the damage to your residence and to your belongings.
- If you bought flood insurance only to cover your home, you wouldn't receive compensation for personal belongings.
- NFIP requires 30-day waiting period from the date of purchase before the flood insurance policy takes affect. Because of this, if you did not purchase your flood insurance well ahead of flood warnings, you might not get any compensation for flooding damages.
Although they sound very similar, do not confuse a catastrophe insurance policy with a catastrophic insurance policy. The latter is a type of health insurance—often referred to as a catastrophic health plan—designed to help pay for major medical emergencies, accidents, or illnesses.
Catastrophe Insurance vs Hazard Insurance
Catastrophe insurance overlaps with and is often referred to as, hazard insurance. However, hazard insurance usually reflects the proverbial "acts of God" events: volcano eruptions, lightning, tornadoes, etc. Hazard insurance may also refer to the section of a general homeowners policy that covers these things.
In contrast, catastrophe insurance refers to more far-reaching coverage, applying to man-made disasters as well as natural ones; it also tends to refer to a standalone policy that is separate from regular homeowners insurance.