Reinsurance and Man-Made Catastrophes
The purpose of reinsurance is to financially help the ceding insurer when they face very high losses which are linked to a catastrophe. However, it is important to note that reinsurance companies do not consider all catastrophes to be the same. There is a very clear and marked distinction between natural calamities called nat-cats and man-made catastrophes. Almost, every reinsurance policy will cover the damage arising from nat-cats. However, the same cannot be said about man-made catastrophes.
As a student of reinsurance, it is important for us to understand the difference between nat-cats and man-made catastrophes and how it impacts the reinsurance policy. This article will provide a detailed analysis of the same.
What are Man-Made Catastrophes?
Natural events like hurricanes, floods, and earthquakes which cause extensive damage and result in huge losses to the reinsurance industry are called natural catastrophe events. However, there are other similar events that can cause huge losses to the insurers as well as the insured. Such events do not arise because of an act of nature. Rather, they occur because of man-made events.
The September 11 terrorist attacks which took down the twin towers in New York is an example that can help explain the phenomenon of man-made catastrophes. This event caused massive losses to insurance companies which ran into billions of dollars. However, the cause was entirely man-made. There have been several such events since then. Events such as cyber security threats, strikes, pollution-related accidents, bridge collapses, riots, etc. can all be classified as man-made catastrophes.
It is important to note that sometimes there can be a thin line between natural catastrophes and man-made catastrophes. The recent Covid-19 pandemic is a perfect example of such an event. Now, the Covid-19 virus may have evolved naturally. However, it was the spread of the virus across the globe that was causing huge losses. This spread was not a natural occurrence. Instead, it was caused by human beings when they traveled to different places across the globe.
Features of Man-Made Catastrophe
Man-made catastrophes are inherently very different as compared to nat-cats. This is the reason why the reinsurance industry considered them to be separate. Some of the distinct features of man-made catastrophes have been listed below in this article.
The fact of the matter is that man-made catastrophes are quite different as compared to natural catastrophes. Reinsurance companies are aware of these differences and the challenges that come with underwriting man-made catastrophes. It is for this reason that such covers are offered separately and not merged with the cover for natural catastrophes.
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