Definition - What does Risk Spread mean?
Risk spread is a business strategy employed by insurance companies. It involves selling insurance covering the same risk in one period or selling a huge number of policies with different coverage in many areas.
Spreading out risk in this way allows insurers to avoid paying claims that threaten to ruin their financial health, as could happen if all of their risks were not diversified.
Insuranceopedia explains Risk Spread
Selling coverage for the same risk in a single area can lead to financial problems if a local occurrence results in a massive number of claims. Suppose, for instance, that a company sells flood insurance only to homeowners who are clustered in a single, small region. If that region experiences a flood, the company might well receive claims from every single one of their customers at once.
To avoid this, they must sell their flood insurance policies throughout different regions. That way, if a number of claims come in from one area following a flood, the premiums collected from policyholders not affected by it can help compensate for the large payments the insurer needs to make.
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