Question

Discuss the effect and risks of pooling arrangements by answering the following:

How can pooling arrangements increase small-business insurance coverage?

Identify how risks can be reduced in a pooling arrangement.

Do you think there are any regulatory changes needed to make pooling arrangements more effective?

Answer 1

1.Pooling arrangement is a facility wearin a bunch of small businesses come together to obtain better insurance rates and plans by using their increased purchasing power. This helps them to be at par with the big clients who get discounts on their insurance policies. The benefit of pooling arrangement is specially seen in health insurance coverage which was earlier difficult for small businesses to incorporate in their compensation schemes. This has allowed small firms to increase the coverage for their employees due to competitive rates obtained by pooling arrangements.

2: The standard deviation of loss without pooling is much higher than the standard deviation of loss derived after pooling. The benefit of risk pooling in uncorrelated losses is that it reduces the uncertainty since the variance declines and the maximum probable loss also decreases. The loss becomes more predictable and this reduces the risk. In case of correlated losses however the risk does not reduce very much due to pooling.

3: The rules and regulations which govern the health insurance pooling arrangements differ widely from state to state and this creates complications in pooling arrangements. Hence a separate and uniform regulation is required for pooling insurance which is applicable across states.