<<A difference is that a writer of calls can still sell their underlying position for better than they could have if they hadn't written the calls (buy back the (cheaper) options, sell the stock same as they would have if they had never written calls). In contrast insurance underwriters would have to pay more to get out if the odds of a flood went up. >>
I'm comparing writing a covered call to writing insurance, you are focusing on the incremental addition of a call to a long position. The covered call is the same as writing a naked put, you have the downside and limited upside and receive a premium. If the stock plunges and you want to exit, the costs are high (although the premium you received offsets it). Same would be true if a writer of Florida hurricane insurance wants to buy reinsurance while a big one is heading toward land. Reinsurance might be available but it would be very costly. The insurer is in some sense long the cost of the house since it pays for it if it is destroyed. The insurance could in fact be written by saying, if the house is destroyed by a flood or hurricane, the homeowner can put the house to the insurer for its insured value.
Insurers generally make make money by diversifying, trying to write uncorrelated risk and then taking advantage of the law of large numbers. In that sense, what a writer of a put (or covered call) is doing is quite different. But both take risk for a premium.
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