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
If a potential risk is big enough then the individual insurers will just take a small percentage. Then they can reinsure that if they feel too ‘exposed’.
Then if that risk is too big for the Reinsurers then they can reinsure it too (for instance I’ve seen an old policy for earthquake insurance for Tokyo and the layers are insane.)
Insurers tend to limit their exposure to any one type of risk anyway so they don’t get hit multiple times for a single event.
They spread risk (types of policies, geographic), analysis of pst data to determine future risk and payout cost used to set premiums, hoard & invest cash (cash reserves are separate from operating income/profits), take out reinsurance policies (so Stars Farm, Allstate, etc. have coverage that pays out losses beyond an amount, say $5B in homeowners claims in a year)
In the UK there is Lloyd of London and the Lloyds names.
https://en.m.wikipedia.org/wiki/Lloyd%27s_of_London
they generally support the insurance industry by maintaining sufficient reserves to cover risk. The risk is spread accross the industry rather than one firm by virtue of everybody contributing to the fund.
From recollection in the 2008 banking crisis the Lloyds names were asked to increase their contribution due to the losses incurred.
Lloyd’s of London, for instance, does a lot of insurance for insurance companies. It protects the insurance companies in the unlikely catastrophic instances where even their reserves won’t cover it.
Berkshire Hathaway is another huge reinsurer
Latest Answers