> IIUC, it's because a war would likely cause harm to a large number of clients at the same time. The insurance company could not afford to pay so many concurrent claims.

disclaimer, I know nothing about the insurance industry, but for sake of intellectual argument:

insurance companies already have to deal with scenarios like this e.g. home earthquake insurance in California.

They do this by re-selling the income and risk from their policies in the "re-insurance" market. This spreads the risk out to counter-parties (who are in the other parts of the US and the world) who buy this stream of income+risk.

In turn, those counter parties are probably buying the income+risk of all kinds of insurance policies from different geographies so any one event of earthquake or war is less likely to catastrophically affect them.

Yes but even though you might be able to sell “act of war” insurance, like earthquake insurance it wouldn’t be something covered by a generic policy

But maybe it should be!

Why do we allow these exclusions in the contracts?

I'm sure we have regulation on what can and cannot be part of the insurance terms.