Which of the following demonstrates effective risk management in insurance?

Diversification of investments is a fundamental principle of effective risk management in insurance. By spreading investments across different asset classes, geographic regions, and industries, an insurance company can reduce the overall risk of significant losses that might occur if one particular sector or investment performs poorly. This strategy helps ensure that the financial health of the insurer remains stable even during economic fluctuations, allowing the company to meet its obligations to policyholders.

The other options, while they may have relevance to an insurance company's operations, do not directly exemplify risk management in the same foundational way. Lowering premium costs might attract more customers but does not address the underlying risks the company faces. Minimizing payouts may lead to dissatisfaction among policyholders and potentially create liabilities over time. Regular adjustment of premiums is certainly important for aligning pricing with risk, but it does not actively manage risk in the context of investments and financial stability like diversification does.