6.7 Changing weather patterns

Question 1

Catastrophic loss definition

Answer 1

Losses as a result of extreme weather events

Question 2

What are the two main ways of dealing with the risk of catastrophes?

Answer 2

• Avoidance - taking steps to eliminate the financial impact of the event
• Preparation - recognising that we cannot stop a weather event from happening, but taking steps to reduce loss when it does happen

Question 3

What does the Environment Agency advise in regard to flooding insurance?

Answer 3

• Shop around for the best insurance policy
• If they cannot find affordable insurance through a normal insurance provider they should look for a specialist broker who will negotiate on their behalf

Question 4

How do insurance companies try to limit their exposure to extreme weather events?

Answer 4

By issuing ‘catastrophe bonds’, each of which is based on a certain specifically defined disaster

Question 5

How do catastrophe bonds work?

Answer 5

• Investors purchase the bonds and receive a good rate of interest as long as the disaster does not occur
• If or when it does occur, they lose their capital and the insurance company does not have to pay them back what they invested