Financial survival in the wake of a natural disaster

Surviving Financial Disaster

By Anita Johnston

Direct Lending Solutions Staff Writer

Disasters, though unwanted, are an inevitable part of our lives. Even if we make ourselves safe against manmade and mechanical disasters there is no escape from natural disasters. A disaster not only causes untold damage to lives and property but also leaves a permanent scar in the memories of people who survive the disaster. Disaster can assume many forms: a spread of epidemic, a terrorist attack, an earthquake, a flood, a hurricane, a fire, an accident or a sudden illness etc. A disaster can also assume simpler forms like a stock market crash, telephone lines going caput, computer data lost and theft. The later ones assume importance for business where real time transactions and just-in-time inventory is involved. Sophisticated computer models are projecting that industries and society faces a risk of natural disaster that could cause damage worth of $75 to $100 billions.

While it is not easy to completely protect ourselves from disasters in the event of disasters striking in different forms for which we are the least prepared, however, there are ways to carry on quickly after a disaster has struck provided we are lucky to be alive after the catastrophe. It is imperative that businesses as well as individuals have a plausible contingency plan to ensure quick recovery to reduce damage. Quick recovery and taking hold of the situation after a disaster has struck, requires pre-planning. Making provisions for financial recovery is huge part of this planning.

Insurance enters the picture here. Any type of disaster that may cause financial loss can usually be recovered through insurance. From a disaster like Hurricane Katrina to the terrorist attack on the WTC and the Pentagon, insurance covers it all. It is in the interest of the people that they insure their property and lives to overcome financial crisis after a disaster.

The principle of insurance states that the timing and the occurrence must be uncertain and the person whose property is insured must not be the perpetuator of the loss-causing event. The loss needs to be significant to be covered by insurance. The insurance company estimates the magnitude of financial loss that might occur if the person is insured if the catastrophe takes place. The premium is then set accordingly, taking into account the uniqueness of the coverage. For instance if the coverage is unique like The Hope Diamond, the insured is supposed to pay more in premium. While normal insurance covers disasters like fire, earthquake, accident etc... it doesn’t have a high rate of premium.

It’s prudent therefore to insure your life and property to overcome a financial crisis in the event of a disaster. In excess of $45 billion has been fixed as the loss of the insured by hurricane Katrina and the 9/11 attack figures stands in excess of $20 billion. In excess of 3.4 trillion dollars worth of insurance premium was collected in 2004.

Sometimes insurance companies anticipate their inability to pay for the disasters. To protect themselves and avoid depletion of their financial resources they purchase reinsurance from companies who are called reinsurers. Recognizing the limits of the insurers as well as the reinsurers some insurers and financial experts has packaged catastrophe risks as securities. Buy selling and buying these securities, the insurers and financers share catastrophe risks with the investors and keep the insurance market liquid so that no insured party is ever denied financial compensation in the event of a disaster.

Some Points to Consider in Preparation:

Buy adequate insurance
Inquuire about flood insurance
Inquire about earthquake insurance
Take measures to reduce your risk
Make a record of your property and personal possessions
Keep important documents and valuables safe
Start an emergency cash fund

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