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
For one, they, like banks, probably have rules that govern how much money they have in readily cashable forms to disburse to claimants. Like maybe they have to be ready to pay out 10% of their total holdings (banks have to have a certain amount of ready cash for depositors to withdraw). The exact rules probably depend on the country and the company and how risk-averse they are.
Secondly, every insurance company is going to be geographically and portfolio diverse. Meaning there will never be an insurance company that _only_ insures wooden residential structures in drought and forest fire prone areas. Yes, the insurance premiums for those clients will be higher, but if there IS a huge forest fire, the claims for them will be softened by continued revenue of premiums from other clients in completely different areas of insurance and elsewhere geographically.
In the case of whats going on in Australia (you know, the whole country burning down), its going to be a rough year for Australian insurance companies. A lot of payouts gonna happen. But, the coastal cities that don’t burn down, where frankly the majority of the populace lives, will continue to pay premiums. And, to hedge against big disasters, the insurance companies will have pretty good and pretty safe investments. They don’t just take your insurance premiums and blow it on drugs and hookers. Ok, some, but not all. Its even possible that insurance companies themselves have insurance against massive payout disasters.
And, stats wonks at insurance companies are continually looking out for this type of thing. Like, how likely is it that all of our rural clients have their houses burn down in a freak once in 100 years forest fire. In fact they call disasters exactly this based on their likelihood of occuring. 50 year floods, 100 year floods. A flood so bad it happens once every 100 years.
As the likelihood of things like these fires and floods goes up with climate change, our permiums (in likely affected areas) will continue to go up. Watch flood premiums for people in flood prone and fire prone areas of the American south and California hills start to skyrocket if they haven’t already.
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