What is the insurer's concern with catastrophic loss events?

• A. They always result in profit
• B. They improve risk diversification
• C. They are easy to cover
• D. They can lead to insolvency if a single event causes many claims

Answer: (D)

Catastrophic loss events test an insurer’s solvency by concentrating a huge amount of claims in one or a few events. When a single catastrophe occurs, payouts can spike far beyond the normal pattern, potentially exhausting reserves and capital. If losses from that event exceed what the company can absorb, insolvency becomes a real risk. This is why risk management focuses on capital adequacy and to mitigate that tail risk with tools like reinsurance and catastrophe coverage. The other statements aren’t accurate: profits aren’t guaranteed by catastrophes, diversification doesn’t fully protect against a tied-to-one-event scenario, and such events are not easy to cover without spreading risk across layers, markets, or instruments.