Question 41

An insurance company best achieves a good spread of risk by writing insurance in as many different locations as practicable.

By diversifying its portfolio across various geographic locations, an insurance company can mitigate the impact of localized events that may lead to significant claims.

A) Write a small and restricted number of risks

This option is incorrect because limiting the number of risks does not enhance risk diversification. A small portfolio concentrated in a few risks increases vulnerability to significant losses if those specific risks materialize.

B) Insure a small number of risks in multiple locations

While this option does introduce some degree of geographic diversification, insuring only a small number of risks still limits the overall risk pool. A more extensive range of risks would provide a better spread and reduce the impact of any single loss event.

C) Insure a large number of risks within a single location

This option is also incorrect as it concentrates risk in one area, making the company susceptible to catastrophic events affecting that location. A large concentration can lead to overwhelming losses if adverse events occur.

D) Write insurance in as many different locations as practicable

This is the correct choice since it allows the insurance company to spread its risk over a wider area. By writing policies in various locations, the company reduces the chance that a single event will significantly impact its overall performance, achieving a better risk balance.

Conclusion

The best approach for an insurance company to spread risk effectively is to write insurance in as many different locations as practicable. This strategy counters the effects of localized disasters and enhances overall stability. Other options fail to provide the necessary diversification, leaving the company exposed to significant losses.