Some natural disasters devastate huge amounts of property and assets costing huge amounts of money that I would assume policy holders would want to claim. Maybe I am naive to the huge amounts of profit that insurance companies make, but how do they survive financially?
In: Economics
To add to what other have said: they diversify/have exposure limits. So first, a given policy may be underwritten by a syndicate of many insurers, each taking on just a small percentage of the risk. Second, the individual insurers may then further reduce their exposure by purchasing reinsurance, which is essentially insurance provided by one insurance company to another insurance company, covering losses payable by that second company.
Each insurer will have internal exposure limits to ensure that any particular catastrophe will not result in undue losses.
Note that this is not always followed, and has had devastating results for certain insurers. For example, see below from the Wikipedia entry on Lloyd’s of London (Lloyd’s is probably the largest and most well known insurance market in the world):
“For most of Lloyd’s history, rich individuals known as Names backed policies written at Lloyd’s with all of their personal wealth and took on unlimited liability…[t]he asbestosis losses in the early 1990s devastated the finances of many Names: upwards of 1,500 out of 34,000 Names (4.4 per cent) were declared bankrupt.”
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