Insurance survival guide for modern disasters

Insurance is a necessity for all Americans, especially in the face of climate change, which has escalated the frequency and severity of natural and man-made disasters. At some point, you may need to rely on your homeowners, renters, or business insurance policy--if you are fortunate enough to have one with a financially stable insurer capable of processing your claims.

What is insurance?

Insurance is a financial mechanism in which insured parties--individuals, businesses, or other entities--pay predetermined amounts (premiums) to insurers. In return, insurers agree to reimburse them (indemnify) for pre-defined losses stemming from specified risks, as outlined in a formal contract, the insurance policy.

Types of insurance in the U.S.

1. Life and health insurance

o Life Insurance: Provides a death benefit to beneficiaries upon the policyholder's passing. Term life offers temporary coverage, while permanent insurance (e.g., whole or universal life) provides lifetime protection. Death benefits are generally tax-free.

o Health Insurance: Covers medical expenses by pooling risks and funding healthcare benefits through premiums or payroll taxes.

2. Property and casualty insurance

o Property Insurance: Covers financial losses related to personal or real property, such as your home or car. It indemnifies losses, restoring insureds to their pre-loss condition without overcompensation.

o Casualty Insurance: Focuses on liability coverage for negligent acts or omissions, such as a doctor's malpractice insurance, compensating third parties harmed by the insured's actions.

Foundational benefits of insurance

1. Indemnification: Reimbursement for covered losses, such as fire damage to a home or theft in a business.

2. Risk reduction: Insured individuals avoid the financial uncertainty that comes with self-insurance, where catastrophic losses can devastate personal finances. For example, an uninsured homeowner might face a $500,000 fire loss with no external assistance.

3. Risk management support: Insurers often provide tools and programs to help insureds mitigate potential risks.

The role and function of insurance companies

The primary goal of insurance companies is profitability, achieved by balancing risk transfer and operational efficiency. Key operational areas include:

• Marketing

• Loss Control

• Underwriting

• Premium Auditing

• Claims Management

The viability of insurance relies on the law of large numbers, allowing insurers to accurately predict losses and set premiums that cover costs, reserves, and profits.

How do insurance companies make money?

1. Underwriting Profit or Loss: Earned premiums minus expenses and losses determine the underwriting result.

2. Investment Income: While holding premiums, insurers invest in various asset classes, generating additional revenue. For instance, property and casualty insurers in 1990 earned $32.9 billion in investment income, offsetting a $20.9 billion underwriting loss to achieve a net after-tax income of $11.8 billion.

However, contemporary challenges such as climate change have resulted in heightened incurred losses, placing pressure on reserves and jeopardizing the stability of the industry. Resolving this requires collaboration among stakeholders.

Insurance for fire losses

Key Policy Types:

1. Homeowners insurance

o Covers structural repairs, personal belongings, liability protection, and additional living expenses (e.g., hotel stays during repairs).

o Adequate coverage should account for full rebuilding costs.

2. Business insurance

o Physical Loss Coverage: Repairs and replacements for damaged business property.

o Business Interruption: Compensation for lost income during rebuilding.

o Contingent Business Interruption: Coverage for losses due to supply chain disruptions.

o Extra Expense Coverage: Costs incurred to maintain operations post-loss.

3. Crop insurance

o Specific to agricultural businesses, covering losses such as damage to vineyards or farms.

Final thoughts

Each insurance policy is governed by its unique terms and conditions, subject to coverage limits and exclusions. Policyholders should thoroughly review their policies and seek immediate advice--whether through legal counsel or nonprofit organizations--to ensure proper claim presentation. Missteps in early interactions with insurers can have long-term repercussions, underscoring the importance of informed and proactive engagement.

For more information, consult reputable sources, including the Insurance Information Institute (https://iii.org).

In the meantime, consider donating to vetted, reputable nonprofits or Non-Governmental Organizations (NGOs) with the expertise and commitment to help those affected by this tragedy recover. Recommended organizations include United Policyholders for insurance claims assistance (https://uphelp.org/), Native Americans in Philanthropy (https://nativephilanthropy.org/blog/support-for-la-fires), Charity Navigator (https://www.charitynavigator.org/losangelesfires), CBS News resources (https://www.cbsnews.com/news/help-victims-california-wildfires-affecting-los-angeles-county/), and the National Consumer Law Center for legal tools and resources to assist disaster victims (https://nclc.org/).

You can also seek support from qualified mental health professionals for yourself and your loved ones via this link.