Posted in Finance, Accounting and Economics Terms, Total Reads: 240
Definition: Catastrophe Hazard
Catastrophe Hazard refers to an event like earthquake, tsunami, hurricane or any other event which may cause large scale losses of property and other assets. Generally the impact of the event is much higher to cover the losses instantly.
There is a hazard analysis mechanism to analyse the severity of the hazard along with the risk. The severity of an event can be categorised in 4 types: Minor, Major, Hazardous and Catastrophic. There are various risk mitigation frameworks which have been developed by international bodies like UN and country’s own disaster management committees. These may included emergency preparedness and risk emergency fund (disaster emergency fund in India), aftermath coping. There are insurances provided for catastrophic events but many companies try to avoid coverage of such events under their normal clauses. Since large losses due to catastrophic events causes the insurance companies to have high risk, sometimes such large losses due to unavoidable natural hazards are referred to as ‘Act of God’ by some companies. Also companies may charge a higher premium to provide such insurances. Also to provide catastrophic insurance a company has to maintain a catastrophe reserve in order to prevent itself from sudden shock of an unexpected event whereby it could fulfil its liabilities.
For Example: The 2004 Tsunami in Indian Ocean, resulted in a large scale loss of property and other assets. A company which has provided catastrophe insurance to people will have to provide compensation for such a large scale loss.