>Another classic detail of insurance markets is that insurers need to diversify the risks that they underwrite: for example, if you provide flood insurance, the

>Another classic detail of insurance markets is that insurers need to diversify the risks that they underwrite: for example, if you provide flood insurance, then you wouldn’t want to write all your policies in a single town by the river: when one house gets flooded by a storm, chances are that all the houses get flooded, and you go out of business. That’s concentration of risk, and insurers strive to avoid it. If I have insured a whole population by the river, then I'm heavily incentivized to sell an additional insurance policy to someone else by that same river, after all, if there is a flood, I cannot become more bankrupt, and in the other case, I collect one more premium.