And insurance company can specialize in ensuring a certain "type" of people instead of just all types of people from one location.

For example if I wanted to specialize my insurance company to ensure only farmers and cattlemen, I would be able to capitalize on efficiencies and additionally be able to provide valuable information and risk management techniques because all of my customers are from the same industry.

The network problem exists in whole part due to the actions of government involvement in regulation in the health insurance market. Get them out.