Like all industries, the insurance business faces its share of challenges

Such monitoring is designed to ensure that the carrier does not assume too large an exposure to any potentially large-scale loss in any particular part of the United States or the world. Prudent insurers manage this threat by aggressively monitoring and managing their aggregate exposure to threats such as floods, hurricanes, earthquakes and terrorist attacks. One of the greatest threats to an insurance company's balance sheet is a catastrophic event, manmade or natural, that destroys multiple structures or injures hundreds of people. Chief among these are ensuring long-term profitability and financial strength, insuring unpredictable exposures (especially those emanating from the often-irrational United States tort system) and the complex insurance regulatory environment. As a result, these organizations, and individual insurers, project estimates of future losses that will emerge from policies written today.

These organizations analyze and disseminate loss cost data based on risk classifications of potential exposure to loss. Insurers are especially vulnerable to the pitfalls of under-pricing not only because of competitive pricing pressures, but because the insurance industry, uniquely, does not know its "cost of goods," or the future losses to be paid out and must, therefore, project its cost of goods. The company's financial strength will be severely shaken, and, eventually, insolvency may even result. In these circumstances, the company's underwriting risk will exceed its financial capacity. As a result, they may not collect sufficient premiums from customers to respond to eventual losses. Some companies price (or under-price) to gain market share or do not have the expertise required to price risks appropriately. A second major challenge to an insurer's long-term profitability - and viability - is systematic under-pricing. It models the "probable maximum loss" it could incur in these areas to ensure that the magnitude of potential losses does not exceed a certain percentage of its capital base. For example, an insurer may monitor carefully how many homes or buildings it insures in high-risk coastal areas or its workers' compensation exposure in congested cities vulnerable to high-fatality terrorist attacks.