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What Is a Catastrophic Loss?

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  • Written By: Geri Terzo
  • Edited By: Shereen Skola
  • Last Modified Date: 31 October 2016
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A catastrophic loss can be described as a number of things. The loss could be financial in nature, or it it might represent the loss of human life. Severe weather circumstances can be the cause of losses that are unrecoverable for a family, business, or an insurance provider. The death of a key executive at an organization whose involvement is tied to the viability of the business, represents a loss that is catastrophic. Any single event or series of happenings that cause a significant failure can have catastrophic consequences.

Sickness can lead to catastrophe. Certain insurance policies cover catastrophic illnesses, but some policies fail to include less severe illnesses that can still have serious financial implications for people. Subsequently, sickness and disease can trigger a catastrophic loss in an individual's personal life or business. For instance, an inability to manage health care bills could lead to an individual or corporation bankruptcy filing. A business might be forced to shut its doors as a result.

In the business world, a company might have risk management measures in place to protect against certain losses. A catastrophic loss could be something that happens that goes beyond any negative event that might have pragmatically been considered. It is an unexpected and unplanned for situation, and it could have dire consequences for any organization.

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An individual might experience a catastrophic loss in response to some personal injury. If someone experiences a serious accident that prevents him or her from performing work, the person might lose income and become unable to keep up with financial obligations. The injury led to the catastrophic loss of finances that might result in a foreclosure or other repercussions.

While insurance coverage is designed to protect individuals and businesses from failing after a catastrophic event, an unusually frequent advent of extreme occurrences in something like the weather could have negative implications on an underwriting business. If an insurer is receiving an unusually high number of claims in response to unprecedented weather events, it may trigger a catastrophic loss for the underwriter. This loss can cause financial catastrophe because profits are lost as the insurer processes an overwhelming number of claims.

The unexpected loss of a key member of a corporation can be a catastrophic loss to that business. Many leaders become synonymous with a brand, and their death could be especially damaging for the future of a business entity. Unless there is some formal succession plan in place, a catastrophic loss of life could call into question the future of an organization.

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