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What does the phrase "spreading the risk" mean with regards to risk assessment of natural hazards/disasters?

I came across the phrase in the World Economic Forum document, A vision for managing natural disaster risk. A quote from the document:

There are various options for risk management – avoidance, reduction, transfer or retention. Risk transfer is the underlying tenet for insurance markets, passing a liability onto another party (spreading the risk). Risk pooling is vital to the recovery of individuals, firms and economies following a natural disaster.

More specifically, what does the phrase mean with regards to insurance and aid, to reduce vulnerability to a disaster/hazard event?

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Insurance may be the best example.

As the document you linked to describes in some detail, there are lots of ways of spreading risk. Traditional insurance is one common mechanism. I think their point is that with a functional insurance model, the effects of a natural disaster may be less profound and/or less protracted (see page 27 of the report).

Think of risk as the possibility of something unpleasant happening — say, something resulting in a financial cost. For example, there's a small risk of a hurricane destroying my house. I couldn't afford to rebuild it if that happened. So I buy indemnity cover for some small fixed monthly fee. Now there is essentially no risk to me, just a small definite cost. In effect, I have transferred my risk to the insurer.

The risk hasn't gone away. In exchange for my monthly fee, or premium, the insurer has assumed the risk of having to pay me a lot of money at some point in the future. It has been pooled with lots of other people — the insurer's other clients — so there's also the grave risk of everyone claiming at the same time. Weighing these risks and setting the premiums accordingly is what insurance companies have to be really good at. Read up on the insurance consequences of the San Francisco earthquake, the September 11 attacks, or Hurricane Andrew.

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Suppose you don't have your house insured. When natural disaster strikes your uninsured house, you are fully responsible for the costs in getting your house repaired. If you have a mortgage on your house, you are still liable for paying that mortgage even if the house is reduced to rubble. An insurance policy transfers some of that risk to the insurer. Now they are liable for paying for a share of the repairs should disaster strike, assuming the damage is covered by the policy. You still have the risk that disaster never will strike your house. In that case, you would have been better off not getting that insurance policy.

Insurance works in part because it spreads the risk around amongst all of the policy holders, the vast majority of whom are are not struck by disaster. Insurance can leave the insurer holding a lot of risk. This is where the concept of reinsurance comes into play. Insurance companies take out insurance policy with reinsurance agents, thereby spreading the risk around even further.

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