Property insurance products can cover loss of, or damage to real property (such as a home or place of business) or personal property and assets (including business inventory, personal goods or machinery) from causes such as fire, weather, or theft. These may include coverage in the aftermath of catastrophic events including earthquakes, hurricanes and tornadoes.
Catastrophic risk in property insurance contracts is extremely costly and difficult to ascertain, and is almost always supported by a reinsurance contract.
Property insurance products must balance the risk of fraud and the desire for an appropriate payout with the cost and delay of verifying damage to the property:
- Some products indemnify policyholders for the value of the loss or damage, but the verification needed to do so may be time consuming, costly, or even impossible.
- Others provide a “standard” payout once the loss or damage has been established, regardless of the value of the product.
- Others provide a payout linked to the performance of an index, such as a rainfall gauge (such index-based products are also common in agricultural insurance). This adds a component of basis risk to the insurance.
- Barbara Magnoni & Derek Poulton (2013). MILK Brief #18: "Doing the Math" - Property Microinsurance in Coastal Colombia. Appleton: MicroInsurance Centre.