system
Given the following post, respond as if you're commenting on Reddit:
human
When a natural disaster happens, how do insurance companies not go bankrupt?

I'm guessing that a lot of the people in Houston right now are insured, and those insurance companies are going to have to shell out a ton of cash- how do insurance companies have enough money to pay for all these damages? Do insurance companies expand and diversify locations to minimize the probability one disaster wipes them all out?
gpt
Not very knowledgeable here, but here's a brief explanation on two main ways:

1. Large enough insurance companies have policy holders across the country, even if one area is hit hard the rest may never get hit at all. It's a numbers game, do we have enough low-risk policy holders to compensate us for the high risk ones?

2. Insurance company's take out insurance against things like this, just in case.

Insurance is just a fancy term for 'financial contract for if shit hits the fan'. This is where we get things like the Futures/Forwards market from, people trying to hedge their risk by selling to people willing to gamble.