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Could natural disasters cause insurance companies to go out of business?

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Listener Alex Duerre from Anchorage, Alaska, asks:

How will the Los Angeles fires affect the United States insurance companies? Taking into account 2024’s Hurricanes Helene and Milton, at what point do insurance companies fail to pay out insurance claims with numerous natural disasters in America? Could insurance companies fail?

The catastrophic Los Angeles wildfires have destroyed at least 12,000 homes, schools and other structures since they began earlier this month. Insured losses could reach as much as $20 billion. 

Many of the insurance companies we have now were formed during “peace time,” which is when the consequences of climate change were not visible, said Daniel Aldrich, a political science and public policy professor at Northeastern University. But over the past century, the number of natural hazards and their magnitude has been increasing due to climate change, Aldrich said.

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