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
Reinsurance is a major part of the answer, as other commenters have posted. However, I haven’t seen a post about government-subsidized insurance for some high-risk types of insurance.
In general, insurance companies make money because over time and *over their entire set of policies* (compare to below) the policyholders pay more than they use. For example, over the course of the average person’s entire life they will likely pay more money in insurance premiums than they would spend repairing their car and paying for wrecks they get in (car insurance). But for the select few that have major collisions, that won’t be the case and insurance protects them (and the people they hit/injure).
However, with flood insurance this “equation” gets largely skewed, because **people who aren’t at risk of flooding won’t get flood insurance** (whereas most everyone who drives gets car insurance). Why would someone in Nebraska get flood insurance when there are hardly any major rivers/lakes to flood (apologies if I’m mischaracterizing Nebraska)? Conversely, nearly every landowner in New Orleans (who can afford it) has flood insurance. So now the insurance companies are in a much riskier situation because they’re basically only receiving money from high-risk people who will ultimately be paid more than their premiums in the event of a flood.
This is where the government comes in. The government provides some insurance programs ([NFIP](https://en.wikipedia.org/wiki/National_Flood_Insurance_Program) in the US for flood insurance) to provide coverage where normal insurance companies don’t want to. Now that the government is involved, more people can be covered (because government has access to a whole lot more money), and the government can do things to influence people that private companies can’t. (example: the government can restrict buildings to areas that are less prone to flooding)
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.
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)
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
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