A short look at Insurance

Recently, I have been reading through the study materials for the first actuarial exam and I have come across some very interesting material that gives an eye-opening picture of insurance.    In speaking about the mathematics about why  "covered losses should be reasonably independent", it says

"For example, an insurer would not insure all the stores in one area against fire, because a fire in one store could spread to the others, resulting in many large claim payments to be made by the insurer."

I think this provides a perfect picture of one of the major problems with the current regulatory strategies of the insurance industries.  Insurance allows a large group of people to pool their resources through a company, so that all individuals will be covered in case of a personal or locational catastrophe.  In reality, insurers only insure so many people because they expect that not all of them will actually need to make a claim.  When a mandate says that insurance can only be sold in states where a license is held, the pool of the insured decreases.  What this does is disallow insurers from allowing a proper market to spread the risk around, so that the standard deviation and expected value of an accident increases.  If the expected cost of payout for the insurance company increases, you can only expect the premium that the customer is on the hook for to increase.  Allowing insurance companies to offer policies to those who wish to buy them, no matter the state, would allow the risk to be further spread, and would lower costs for all involved.