Some Statistical Aspects of Catastrophe Risks

Risks of a catastrophic nature, such as war or earthquake, can differ, in a statistical sense, from other ordinarily insured perils only in respect of the distribution of the probability function. For example, although the probability of a loss occurring may be small, its magnitude once it occurs may be very large. One reason for the latter feature is that the sum insured may itself be heavy. But still more important is tile fact that there would be strong positive correlation between similar contiguously situated risks. This is the main reason for the loss taking on a catastrophic character.