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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.

Insurance companies now have to grapple with an increasingly changing landscape. But it is unlikely insurance companies will go out of business because the insurance industry is well capitalized and insurance companies themselves have their own insurance, which is known as reinsurance.

Don Griffin, a property and claims expert with the American Property Casualty Insurers Association, said he thinks insurers will be able to pay out all the claims related to the Los Angeles wildfires.

There are limits on how much people will be able to receive, but insurers "exist to give them every single dime they're entitled to," Griffin said.

To make sure they have enough money to pay out claims, the industry has a surplus, which amounted to a cumulative total of $1 trillion at the end of June last year, Griffin said.

"Every single insurer in the U.S. is required to have surplus," Griffin said. And they have to prove they have an adequate amount of surplus to the state or states in which they do business, Griffin explained.

"It's basically a savings account that can be used for almost any kind of loss that the company has to pay for," Griffin said.

Insurance companies are also subject to a series of checks and balances: state insurance regulators examine their finances and ratings agencies will give them early warnings if they're not doing well, Griffin said.

And once insurance losses exceed a certain amount, reinsurance kicks in, Griffin said.

The insurance company pays the reinsurer a portion of their premiums, just like a homeowner would for his or her policy, Griffin said.

If insurance companies don't feel like they can adequately cover homeowner claims, they'll exit a state. But that is failing in the sense that it is a market failure, Aldrich said.

In California, larger insurers left because they faced climate change-induced disasters and limits on how much they could set premiums, said Benjamin Keys, a professor of real estate and finance at the University of Pennsylvania's Wharton School, in a recent Marketplace interview.

Following the Los Angeles wildfires, homeowners in the state can expect premiums to go up.

As part of a series of recent regulatory reforms prior to wildfires, insurers will be allowed to include reinsurance rates in the rates they charge homeowners, said Kenneth Klein, a professor at California Western School of Law. The amount insurance companies pay to reinsurers is "a very significant cost line," and the amount reinsurers can charge is not regulated, Klein said.

Insurers in the state will also be allowed to raise premiums based on algorithms that do catastrophe modeling, Klein said.

Many states offer Fair Access to Insurance Requirements plans, which provide people with insurance if they don't have access to a regular plan. But in California, the FAIR plan had only $377 million available to pay claims and $5.75 billion in reinsurance as of last week.

"FAIR plans were designed to be a Band-Aid on the insurance market, and in the last few years, they have expanded way beyond their initial intended use," Keys said. "I think the question is going to be whether that system is able to handle a shock as large as this one."