Question

Risks Pooling is utilised by Insurance companies to transfer the risk from an insured individual to a group or a pool to minimize the possibility of losses. Please elaborate on the practicality of this risk mitigating strategy by using an example.

Answer 1

Risk pooling is a concept in insurance of sharing all risks among a group of insurance companies. It helps the insurance company to provide catastrophic coverage by sharing costs and potential exposure.Helps insurance companies offer coverage to both high- and low-risk customers. They also lessen the risk borne by any single insurance company by spreading it among many and avoid the type of massive payout required after a catastrophic loss. As a result the premium cost reduces

For example in health insurance
A health insurance risk pool is a group of individuals whose medical costs is combined to calculate premiums
It allows the higher costs of the less healthy to be offset by the relatively lower costs of the healthy individuals.
It spreads out the costs of insuring higher-risk individuals, such as the chronically ill, the elderly and others who incur greater health costs.The provider make sure the average health care costs of the individuals included in the pool is low so that the premium is low.So larger the pool the premiums will be stable and cheaper