INSURANCE: MAKING RISK MANAGEABLE AND PROGRESS POSSIBLE
Without insurance, the wheels of the global financial system would soon grind to a halt. Insurance makes risk manageable. Its fundamental principle is that the contributions of the many compensate the losses of the few. For several centuries, this model has worked remarkably well for countless businesses and individuals. The one major challenge it faces is catastrophe risk.
Major disasters, whether natural or man-made, or somewhere in between, can inflict damage on a scale that overwhelms the resources of commercial insurance providers. The original classic case was the San Francisco earthquake and fires of 1906. This event destroyed property on a previously unimaginable scale and left 3,000 people dead. The $250M paid out by insurers made it the biggest single loss, in real terms, right up until 9/11.
Twenty insurers went out of business in the wake of the San Francisco quake. Those left standing were quick to exclude earthquake risk from their standard wordings. This set a pattern since repeated many times over. Faced with a variety of costly disasters over the years, the insurance industry has segregated an ever-growing list of low-frequency, high-value risks into the catastrophe category.
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