What Does Catastrophe Loss Index Mean?

Catastrophe Loss Index (CLI), is an index used in the insurance industry to quantify the magnitude of insurance claims expected from major disasters. They are created by third-party firms that research natural disasters and work to provide estimates of the amount of losses from each catastrophe. The catastrophe loss index (CLI) is often used by insurance companies to supplement, or check their internal efforts to estimate the company's expected claims from each catastrophe.

Understanding the Catastrophe Loss Index (CLI)

These indexes help with setting aside reserves for potential claims, as well as determining where or when to send out insurance adjusters to verify insurance claims. CLIs are also used as the underlying basis for a variety of derivative securities and catastrophe bonds. Securitization of catastrophic loss risks allows insurance companies to hedge against disasters, such as hurricanes, which might otherwise threaten to deplete an insurance company's reserves.

Insured Losses Rising

For insurers, few things are more important than setting aside enough reserves to cover losses and making sure the company doesn't have too many policies concentrated in one area, especially a region that's prone to natural disasters. In 2017, a new record was set for losses, including uninsured damage, which came to $330 billion, according to the reinsurer Munich Re of Germany. Of that total, some $135 billion was paid out by insurers to cover these claims.

"The only costlier year so far was 2011, when the Tohoku earthquake in Japan contributed to overall losses of US$ 354bn in today’s dollars," the insurer stated. "The US share of losses in 2017 was even larger than usual: 50% as compared to the long-term average of 32%. When considering North America as a whole, the share rises to 83%."

The main catastrophes were hurricanes Harvey, Irma, and Maria. California's severe wildfire season led to insured losses of $8 billion, and a string of severe thunderstorms mainly in the Midwest and South were responsible for losses of more than $1 billion each.

For consumers, homeowner's insurance is a form of property insurance that covers losses and damages to an individual's house and to assets in the home. Homeowner’s insurance also provides liability coverage against accidents in the home or on the property.

 A homeowner’s insurance policy usually covers four incidents on the insured property – interior damage, exterior damage, loss or damage of personal assets/belongings, and injury that arises while on the property. When a claim is made on any of these incidents, the homeowner will be required to pay a deductible, which in effect, is the out-of-pocket costs for the insured.