Final answer:
Insurance companies have funds set aside in reserves to pay policyholders' claims in the event of insolvency.
Step-by-step explanation:
Insurance is a method that households and firms use to prevent any single event from having a significant detrimental financial effect. Generally, households or firms with insurance make regular payments, called premiums. The insurance company prices these premiums based on the probability of certain events occurring among a pool of people. Members of the group who then suffer a specified bad experience receive payments from this pool of money. In the event that an insurance company becomes insolvent, they typically have funds set aside in reserves to pay their policyholders' claims. These reserves are built up over time through the premiums collected from policyholders.