Risk Management

Risk Management Research Essay 1

Cristina Birittieri

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Managing risks includes identifying, qualifying, and handling the threats that an organization faces. Knowing what types of risks are relevant are vital when figuring out the right ways to control them. Florida often is threatened by natural disasters such as hurricanes and tropical storms. In addition, tornadoes and floods also regularly affect the state. Because the weather is so unpredictable, it is important that people manage the possible losses that can be caused by these natural disasters. It is impossible to avoid, reduce, or prevent natural disasters, so preparing for the loss by buying proper insurance is imperative.

A very important type of insurance to have in Florida is homeowner’s insurance. At any point in the year, the state can be hit by a hurricane or tornado that can severely damage one’s household. Unfortunately, the price of the insurance is relatively high. From 2005 to now, homeowners insurance rates have progressively risen 50 percent throughout the country. Florida currently has the highest homeowner’s insurance rates in the United States; the rates are approximately 98% more expensive than the country’s average. The reasoning behind this is that Florida is enormously more susceptible to major natural disasters than other states for the most part. Insurance companies need to charge a high rate because in the event of a natural disaster, the company needs to have the funds to give to homeowners. However, as previously stated, Florida is very vulnerable to hurricanes and other tropical storms quite often. Insurance companies may not always be able to cover the losses caused by such disasters. Because of this, companies often purchase CAT bonds. 

CAT bonds, short for Catastrophe bonds, were created in the mid-1990s in the aftermath of Hurricane Andrew. CAT bonds pay coupons depending on the loss performance of the underlying loss index. They are securities that transfer a set of risks from a sponsor to investors. These bonds appeared due to the need by insurance companies to ease some of the risks they would face if a large catastrophe occurred that would incur damages that they cannot cover by the premiums. This is an example of a risk transferring technique, for the losses are shifted to another party.