Understanding the Analysis behind Disaster Insurance

Disaster insurance is special coverage that can be added to a homeowner’s insurance policy as a rider policy. The coverage for disaster insurance protects against damaged caused by certain types of natural disasters such as floods, earthquakes and hurricanes. These policies are typically reviewed by the federal government and offered through private insurance companies.

Determining Coverage Limits

The analysis that goes into determining coverage limits for disaster insurance include the probability of loss occurring and the value of that risk. However, disasters that are catastrophic in nature (such as floods, hurricanes and earthquakes) are typically not covered by insurance companies privately.  The reason for this is that the insurance company believes that the nature of the risks associated with a catastrophic event would result in a claims experience that could bankrupt the insurer. Through the support of the federal government, insurers will take on these risks but place limits on the coverage.

The Analysis Performed

Analysis performed by the insurer determines whether or not the risk is isolated or widespread among a particular class of homeowners, such as those within a certain community or geographical area. The loss produced by the risk should be uniform and the insurer must be able to assign a financial value to the loss. The insurer must also be able to show that the risk caused financial hardship to the homeowners in the affected area.