Risk Spreading:

The mechanism  of  risk  pooling we  have  discussed above works only  if  the risks  are  independent between two groups of people.  You  will  find many events, especially the natural catastrophes, such  as  flood, earthquake  and nuclear war where risk are not independent. Thus, when a catastrophic event is  likely  to  affect many people simultaneously, risk-pooling mechanism will not work and we have to look for other means to insure.

A basic idea  to work with is spreading risk such that  it covers  some, of the unaffected people  in  the scheme of  insurance. As  the utility function of risk averse people is convex, taking away small portion of money from each has a lower social cost compared to asking for a lot from a  few people. Usually, private insurance companies  don't  enter in such markets. But often government intervenes by  transferring money among parties. For example, on this type of approach, you should remember the compensation being collected for all kinds of disaster relief.

Risk spreading does not defray the  total  amount of risk faced by  the society. Nevertheless, it improves social welfare as the aggregate loss for the society is lessened than that of the individual loss.