Insurance and the Natural Hazards

Natural hazards--floods, hurricanes, tornadoes, earthquakes, windstorms and hailstorms--cause considerable property damage in various parts of the world. In the United States, average annual damage resulting from these hazards is increasing rapidly. A large percentage of the damages occur as a result of infrequent, but severe, geophysical events (individual storms or earthquakes). If aggregate damage resulting from the event is exceptionally large, the event is called a natural disaster. The number of natural disasters in the United States is increasing each year. Resultant property losses are increasing even more rapidly. Increased density of properties susceptible to damage, increased value of these properties, and increased cost of repair have raised the probability of natural disaster occurrence in recent years even though the magnitude and character of the natural hazards have not changed. Insurance is one means of protection against the natural hazards for fixed property. In this report, one-to-four family dwelling structures re-present fixed property. To provide protection, two components of risk must be evaluated: (i) risk per individual structure and (2) risk of a large number of simultaneous losses---catastrophe potential. The latter component has attained added importance recently with the increased number and magnitude of natural disasters.