How might an insurance company limit its exposure?

An insurance company may limit its exposure by charging higher premiums in certain areas because this approach is a risk management strategy that helps align the cost of insurance with the level of risk associated with specific locations. If an area is known to have higher risks, such as a higher frequency of natural disasters or crime, the insurer can charge premiums that reflect this heightened risk. This process helps ensure that the potential payouts in claims do not exceed the income generated from premiums, thus maintaining the financial stability of the company.

Charging higher premiums in riskier areas allows the insurance company to collect more revenue, which can be used to cover potential losses that arise from claims in those areas. This strategy also serves as an incentive for policyholders to assess and manage their risk more effectively; for instance, they might choose to implement safety measures or move to less risky areas to lower their insurance costs.

The other options may not effectively limit exposure in the same way. Increasing coverage limits could actually increase exposure by providing greater potential payout. Offering unlimited policy options could lead to confusion and potential overexposure to risks without proper management. Expanding coverage areas might spread risk, but it could also increase exposure if the new areas have unassessed or unknown risks.