Catastrophe Loss Index (CLI): Definition & Meaning
With natural disasters reaching an estimated $343 billion in 2021 compared to 330 billion worth of economic loss in 2017, itās easy to see why understanding the impact of natural catastrophes would be important to the insurance companies that cover them. So insurance providers look to the Catastrophe Loss Index (CLI) to help them project the number of insured property losses theyāll need to cover. This allows them to set aside reserves specifically for these types of catastrophic events.
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KEY TAKEAWAYS
- The CLI is used to estimate the number of insured losses resulting from natural disasters, so the appropriate amount of resources is reserved for these events.
- The CLI is helpful in ensuring that a company doesnāt create too many policies in a disaster-prone area to avoid high catastrophic loss risks.
What Is the Catastrophe Loss Index CLI?
The Catastrophe Loss Index – CLI is an index used by the insurance industry to help predict the magnitude of insurance claims that may arise from major disasters. This index assigns a number that covers the expected insured losses stemming from housing, car, and commercial property insurance policies.
The purpose behind the CLI is to provide insurance insights that inform issuers of insurance on how much money theyāll need to have in reserves to handle a large influx of insurance claims during major disasters. It is also used to determine accurate timing and locations to send insurance adjusters when verifying claims during a catastrophe investigation.
CLI also acts as a basis for catastrophe derivative instruments and catastrophe bonds. Essentially allowing insurance companies to hedge their bets against natural disasters. This includes not making too many policies in an area that is affected by a large number of weather-related disasters.
Summary
Overall, the CLI is a helpful tool for insurance companies in tracking losses, assessing their reserves, making decisions about issuing policies, and informing catastrophe securities.
FAQs about the Catastrophe Loss Index
A catastrophe claim results from a natural disaster such as hurricanes, tropical storms, tornados, tsunamis, earthquakes, or other weather-related disasters that can create damage claims for housing, cars, and commercial property.
PCS or Property Claims Services is an internationally recognized organization that assigns all of the catastrophe serial numbers to loss events within the US.
Hurricane Katrina set the standard for catastrophic losses in 2005, with the estimated losses exceeding 89.6 Million dollars in 2021.
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