Most people think of insurance companies as unshakable institutions — financially strong, tightly regulated, and always ready to pay claims. But as Karl Susman explained on Insurance Hour, even insurers can fail. While rare, the collapse of an insurance company sends shockwaves through policyholders, regulators, and the entire financial ecosystem. Understanding why this happens helps both consumers and professionals grasp the delicate balance that keeps the insurance system stable.

Let's break down the key factors behind insurer insolvency and explore what happens when the company you trust to protect your assets can no longer meet its promises.

Every insurance company is built on a simple equation: premiums in vs. claims out. The premiums collected from policyholders form a pool of funds — but that money isn't just sitting idle. Insurers invest it, manage it, and allocate portions to pay claims and operating expenses.

If the balance between incoming and outgoing money collapses — due to mispricing of risk, excessive claims, poor investments, or even fraud — solvency can be threatened. That's why regulators require insurers to maintain reserves: a legally mandated financial cushion to ensure claims can still be paid even in tough years.

However, as Susman points out, those reserves are not unlimited. Catastrophic events, like hurricanes, wildfires, or market crashes, can drain reserves faster than they can be replenished. When that happens, even large carriers can falter.

When a company begins to fail, it rarely happens overnight. The warning signs are often visible months — or even years — in advance.

Here's how the domino effect typically unfolds:

1. Underpricing Risk: To attract customers, insurers sometimes charge premiums too low to cover potential losses. Initially, this boosts sales, but when claims roll in, the math no longer works.

2. Unexpected Catastrophic Losses: Major disasters, such as hurricanes or wildfires, can trigger claims that far exceed projections. If an insurer is concentrated in one high-risk area, it might not survive the financial blow.

3. Investment Losses: Since insurers invest collected premiums, market downturns can erode their assets, reducing their ability to pay claims.

4. Reinsurance Gaps: Reinsurance — insurance for insurers — helps spread large risks. But if a company underestimates its reinsurance needs or its reinsurer defaults, it's exposed to full losses.

5. Liquidity Crisis: When claim payments exceed available cash and assets are hard to liquidat ...