What must an insurer be capable of regarding large-scale disasters?

The ability of an insurer to exclude large-scale disasters and catastrophic events is a reflection of risk management strategies in the insurance industry. Insurers evaluate their exposure to large-scale disasters, such as floods, earthquakes, or hurricanes, and might choose to exclude these risks from certain policies to maintain their financial stability and sustainability. This selective underwriting helps insurers manage their liabilities and prevent overwhelming loss due to catastrophic events. Recognizing the potential impact of large-scale disasters allows insurers to craft policies that effectively balance coverage with the financial risks they are willing to assume.

While it may seem counterintuitive, excluding catastrophic risks can be a prudent strategy for maintaining a stable insurance market where premiums are manageable, and coverage remains available for less risky events. Insurers can still offer specialized products or endorsements that cover certain catastrophic events, but the choice to exclude these risks from basic policies is a fundamental characteristic of the insurance model.