Expected Adverse Deviation as a Measure of Risk Distribution

The concept of risk distribution, or aggregating risk to reduce the potential volatility of loss results, is a prerequisite for an insurance transaction. But how much risk distribution is enough for a transaction to qualify as insurance? This paper looks at different methods that can be used to answer that question and ascertain whether or not risk distribution has been achieved from an actuarial point of view. We also discuss and evaluate the utility of expected adverse deviation, or EAD, which is a straightforward, communicable and effective tool to measure risk distribution for a number of key and clear reasons.