How Insurance Companies Survive Natural Disasters

Article excerpt

First Hurricane Hugo inflicted $4-billion in damage on the southeastern United States, and even more on islands of the Caribbean. Then Hurricane Jerry walloped Texas, resulting in substantial property loss. Days later, the earthquake that devastated the San Francisco Bay Area added billions more to the season's destruction.

The last two months have been real bruisers for casualty insurance companies. Doesn't such a steady stream of catastrophies severely tax the insurance industry's liquidity?

To put it another way, how can insurance companies face such huge claims and still stay in business?

``The industry as a whole will come through just fine,'' says Larry Kibbee of the Alliance of American Insurers. ``There maybe a few companies that cut it closer than they'd like, though.''

How does the industry work when there is a disaster?

Claims adjusters are flown into the area. They set up temporary headquarters wherever they can. Their first priority is to deal with those who have suffered the most damage and therefore most urgently need assistance. Then they begin the very slow task of determining the extent of the company's exposure, based on policy-holder's claims.

In catastrophies such as hurricanes and earthquakes, it isn't always easy to determine the amount of damage. In San Francisco, for instance, buildings that seem intact to the eye may have been damaged.

``They may look all right, but some of them may have been damaged in ways difficult to estimate,'' says Murray Lawrence, managing director of Lloyd's of London. As a result, it could be months before a full appraisal of the damage is completed.

It may turn out that the full appraisal will have little to do with insurance exposure. California law requires that an earthquake endorsement be offered as part of all homeowner policies. But only about one-fourth of the state's insured homeowners had opted for the additional earthquake protection. Of the billions in damage, relatively little is covered by insurance.

(Homeowners are still covered, though, in cases where the earthquake led to destructive fires and water damage, and crushed automobiles are covered under comprehensive plans. …