The unpredictability of future climate brings significant threats for Essay

The unpredictability of future climate brings significant threats for insurance companies. The unpredictability of futu - Essay Example In order to ensure this security, a deal is entered between two parties - the insurer and the policyholder. In the agreement, there is a given amount referred to as premium that is to be paid regularly by the policyholder to the insurance organization. In return, the insurance company agrees to pay a defined amount referred to as benefit or claim payment incase a predefined loss is incurred by the policyholder (Anderson & Brown, 2005, p.2). To avoid ambiguity during compensation, the agreement has to define which losses to be covered by the insurance policies. This would include medical insurance, life insurance, property insurance and many others. The insurance companies establish the premiums for the different insurance policies based on the value of the losses to be compensated and the frequency with which the losses have been observed to occur. Insurance may seem to be expensive and a waste of resources to a policyholder who has not suffered any loss over a long period of time. H owever, in case the unexpected loss occurs, it will be cheaper to have the loss compensated by an insurer. It is actually a way through which risk is transferred from one party to the other (Anderson & Brown, 2005, p.3; WetFeet, 2008, p.64). The advantage that the insurers enjoy is that not all of their policyholders will suffer losses at the same time. This kind of a pooling by the different policyholders enables the few policyholders that have had some loss to be compensated without loss to the insurance company. Climatic conditions contribute to various losses incurred in various fields in the insurance industry. Poor climatic conditions can interfere with business operations, can cause damage and loss of property, can lead to increased disease infection, and increased mortality rates emanating from accidents, floods, earthquakes and other disasters. The climate unpredictability brings significant threats for insurance companies Supportive reasons The occurrences of climatic chan ges and the inability of insurance companies to predict this future occurrence can be a threat to the success of the organizations. Firstly, the disasters often catch the insurance companies unaware due to poor mechanisms for mitigating the catastrophes. The climatic changes may not follow a predefined pattern and an attempt to make a prediction based on the previous occurrences often leads to miscalculations (Mills, 2005, p.1). This increases the vulnerability of the insurance organizations to the disasters. It often results in an increased liability claim leading to losses by the insurance organizations. The insurers are then not able to compensate for the losses that have been incurred (Godoy, 2011). The unpredictable climatic conditions like future occurrences of floods may make an insurance company to incur losses due excessive compensation of the losses incurred by the policyholders. The climatic conditions resulting into global warming provides humble opportunities for the oc currences of other natural catastrophes like wildfire that can be of great losses to the insurance organizations. For instance, the losses that were incurred by the United State’s insurance organizations due to wildfires were valued at $6.5 billion between 1970 and 2004 (Allianz Group& World Wildlife Fund, 2006,