Insurance companies use a concept called diversification to minimize the risk of losses among their policyholders. This means selling insurance to a large number of people in different geographical areas and for different types of risks. For example, a company will be more willing to insure against perils that have a wide spread of risk, such as fire or theft, as opposed to perils with a narrow spread, like flood insurance. This is because flood insurance is more likely to be purchased by those who live near bodies of water, which increases the risk for the insurance company.
