Each year in the United States, communities are devastated by natural disasters. Hurricanes, in particular, can be some of the most destructive natural disasters due to their wide impact area and flooding. On average, the U.S. is hit by one or two significant hurricanes per year, so many people living along the nation?s coasts have flood insurance to protect their homes from the devastation of a hurricane.
Why It Matters
Actuaries mathematically evaluate the probability of certain events and use these probabilities to determine the financial risk involved and minimize the financial loss caused by those events. By determining the risk, actuaries can advise insurance companies on how much money needs to be set aside to pay homeowners in case of flooding.
|Storm||Storm Category at Landfall in U.S.||Average Paid by Insurance Company||Number of Claims|
A histogram of the most recent hurricane insurance payments due to flood loss or damage paints a clear picture of the financial risk and loss caused by these events:
Actuaries can use data in a histogram and measures of central tendency to help insurance companies estimate what they will need to pay toward insurance claims after a significant hurricane event. This information, in turn, also helps insurance companies determine how much money to keep in reserve in order to pay claimants as quickly as possible after a major natural disaster.
See for yourself: http://www.fema.gov/protecting-homes
Pretend you?re the actuary. An insurance company wants to know approximately how much money they should have in reserve for a major hurricane event if they expect approximately 100,000 claims. What would you advise them?