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Let's say there is a fire insurance company X with most of its clients from Region Y. Say that this was Company X's intent, with the knowledge that the following scenario might happen.

A wildfire starts in Region Y, and Company X suddenly owes a lot of money to property owners in Region Y because their houses got burned down by the wildfire. If Company X doesn't have enough money to pay all its clients, what can it be charged with? Are there any geographic limitations on insurance companies to prevent this from happening?

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    Running out of money isn't a crime so the company won't be charged with anything (other than entering bankruptcy) unless there was some sort of malfeasance not specified in the question. Practically, insurance company X would have insured itself in the reinsurance market to mitigate its risks. Mar 20 at 3:28
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    Sorry, not sure how the company's name increases or decreases the chance of claims exceeding reserves. I'm assuming you meant "thereby increasing the expected amount of money it loses". If your fictional insurance company only writes policies on properties in San Francisco, the state insurance commission would demand that it offload a large fraction of the risk in the reinsurance market or would shut it down. That doesn't guarantee that the company doesn't go bankrupt if the Big One hits San Francisco. But it does ensure that some level of operational prudence. Mar 20 at 3:38
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    Not directly an answer to your question, but many insurance policies have "force majeure" and "act of God" clauses, explicitly exempting large-scale events (e.g. flood loss and nuclear war) from claims. The concept is that if a disaster is so widespread that it risks bankrupting insurance companies, government disaster relief would take over instead.
    – R.M.
    Mar 20 at 14:30
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    The company would have to be licensed by the state which includes region Y to do business to do business in region Y. If not, the company is in big trouble. If so, then the company has complied with the laws of the state for region Y and those laws would apply in spending the companies reserves, other assets, and possible bankruptcy. In many states the state would take over their business, as Florida has done with several insurance companies due to storm losses. Mar 20 at 18:52
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    @JustinCave: The company's name in mathlander's case is relevant because it's encouraging buyers to all be insured over something that could be a single event. Thus the outcomes of the company are pretty binary: the event doesn't happen and everything is profit, or the event does happen...and then you just declare bankruptcy and start a new company.
    – Cliff AB
    Mar 21 at 4:31

1 Answer 1

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It goes bankrupt

It happens constantly; 10 per year is the typical number of insurance company bankruptcies in the USA, but it did hit 50 per year in the 1990s.

Typically, these bankruptcies are due to the normal rough and tumble of business—bad luck, bad judgment, bad risk pricing, and bad timing. People don’t go to jail for poor business decisions. Charges might be laid if there was fraud or other malfeasance, but it's easy enough to go broke in any industry, especially so in a highly competitive one like insurance.

Each state, plus Puerto Rico and Washington DC, requires insurers to contribute to a bail-out fund in the case of an insurer going broke, but payouts to customers are capped and will often not be what was payable under the policy.

Also, insurance companies typically take out insurance themselves for major claims - this is called reinsurance. Reinsurance should ideally make sure the insurer cannot go bankrupt from unexpected claims.

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    – Dale M
    Mar 21 at 20:32

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