Question

Describe two types of pure risk for which the technique of risk pooling can be used to reduce risk effectively, as well as two types of pure risk in which the technique cannot be used effectively. In your answer, briefly describe the characteristics of the pure risks that make them well (or poorly) suited for the risk reduction through pooling. POST ON CHEGG ALREADY IS INCORRECT***

Answer 1

In insurance, the term "risk pooling" refers to the spreading of financial risks evenly among a large number of contributors to the program. Insurance is the transference of risks from individuals or corporations who cannot bear a possible unplanned financial catastrophe to the capital markets, which can bear them easily -- at least in theory.

Pure risk is a category of risk in which loss is the only possible outcome, which is the opposite of speculative risk. There are products that can be purchased to mitigate pure risk, such as home insurance being used to protect homeowners against their homes being destroyed. Other examples of pure risk events include premature death, identity theft and career-ending disabilities.1) in cases of home insurance and health insurance risk pooling can be effectively used as of all the individuals who invest in the insurance by the law of large number a miniscule probability of the people actually suffer the real risk. 2) Risk pooling is an important concept in supply chain management . It suggests that demand variability is reduced if one aggregates demand across locations because, as demand is aggregated across different locations, it becomes more likely that high demand from one customer will be offset by low demand from another.

However,consider the 1)"high risk pools", which simply means separating out the sickest, most expensive people in the country and dumping them into a separate program.With the "bad apples" (ie, human beings with terrible medical problems) safely tucked out of the way, the average cost of treating everyone else supposedly suddenly becomes less pricey.This is the exact opposite of the entire point of health insurance in the first place...spreading the risk and hence risk pooling fails here.

2)Liability risk includes economic losses from being held responsible for harming others or their property. This cannot be covered by risk pooling.