Definition
Catastrophe Risk
Catastrophe risk is the exposure to large, correlated losses from a single major event such as an earthquake, cyclone or flood.
Unlike independent risks that the law of large numbers smooths out, a catastrophe causes many simultaneous claims, threatening an insurer's solvency. India's exposure to cyclones, floods and earthquakes makes catastrophe (CAT) risk a central concern for property insurers.
Insurers manage CAT risk through reinsurance (especially excess-of-loss treaties), catastrophe modelling, geographic diversification and, globally, instruments like catastrophe bonds. Adequate CAT cover and reinsurance protect both insurers and policyholders when a region-wide disaster strikes.
Related terms
- PerilA peril is the actual cause of a loss, such as fire, flood, theft, accident or illness, against which insurance provides protection.
- ReinsuranceReinsurance is insurance for insurers, where a reinsurer assumes part of the risk an insurer has underwritten in exchange for a share of the premium.
- Law of Large NumbersThe law of large numbers is the statistical principle that the larger the number of similar risks pooled, the more predictable the average loss becomes.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.