How would Bitcoin insurance have helped in a disaster like Mt. Gox?

[Bizmark13]

I have heard of companies that want to "insure" bitcoins, whether it be for businesses, exchanges, or end users. However, it seems impossible for Bitcoin to be insured. Think about it, when Mt. Gox lost 700,000 bitcoins, how would a Bitcoin insurance company have helped in this situation? The insurance company would need to have reserves equal to 700,000 BTC in order to guarantee that it can replace all affected users' funds. But it would be infeasible for any business today to buy that much BTC.

And if insurance for the lost BTC was paid out using fiat money rather than BTC, that wouldn't help because then everyone who lost money would use their fiat money to repurchase their lost bitcoins. And this would drive the price up to extremely high levels. So either way, users would end up with far less BTC than they started off with.

What am I missing here? How can bitcoins be insured?

[Kluge]

Companies are effectively renting the reserves of insurance companies, so yeah, insurance companies need to have sufficient reserves -- they act very, very similarly to investment banks. While 700kBTC might seem unrealistic, that's "only" ~$437.5M. AIG isn't the largest insurance company on Earth, but has ~$50B market cap, so they could probably get by okay since they can pay in fiat. (maybe users aren't completely satisfied with this, but so what? They got their fiat value back which is a Hell of a lot better than $0 and 0BTC)

That aside, though - insurance companies tend to be pretty strict and asshole-y since their liability is pretty much entirely Gox's security protocols and financial health. They wouldn't allow Gox to do the things it did, and would refuse to service them until they complied with a long, long list of demands and audits. Bitcoin's too big to have small startup insurance companies trying to take over some of these massive accounts, I think, so it'll need to wait for experienced professionals to bone up on BTC info, grab some specialized accountants and code auditors, then jump in.