Registered Insurance Brokers of Ontario (RIBO) Practice Exam

In the context of the insurance market, what does 'spreading the risk' imply?

1. Reducing the coverage offered

2. Distributing multiple policies across various insured

3. Raising premiums for higher risks

4. Encouraging clients to take larger coverage

The correct answer is: Distributing multiple policies across various insured

The concept of 'spreading the risk' in the insurance market primarily refers to the practice of distributing multiple policies across a diverse group of insured entities. This approach helps insurers manage their risk exposure effectively. By having a wide range of policyholders, insurers can balance the losses from a few high-risk clients with the premiums collected from lower-risk clients. This diversification minimizes the impact of any single loss event on the overall financial stability of the insurer. In this context, the other options do not align with the principle of risk spreading. Reducing coverage offered would limit the insurer’s ability to cover potential claims, which doesn’t promote risk dispersion. Raising premiums for higher risks focuses on adjusting pricing rather than spreading risk across a broader base, and encouraging clients to take larger coverage does not inherently address how the risk is managed across different insured parties. Therefore, distributing multiple policies among various insured is the correct interpretation of spreading the risk in the insurance industry.