What is a risk pool?
A form of risk management usually practised by insurance companies to mitigate risk. Insurance companies come together to form a common pool, itself used as protection for the companies against catastrophic events, usually natural disasters. They are also used by government agencies for similar purposes.
Key takeaways
Risk pools are a form of risk management where insurance companies form common pools for protection against catastrophic events like natural disasters; government agencies also use them for similar purposes.
Risk pools recently made US headlines with Trump administration plans to replace the Affordable Health Care Act with high risk health pools for people with chronic illnesses and uninsurable individuals.
Insurance companies, especially health and car insurance providers, use risk pools to offset costs of higher-risk customers who pay higher premiums with those of lower-risk customers.
Lower risk customers often purchase insurance because the premium costs remain less expensive than paying for vehicle damage, medical expenses, or other losses out of pocket.
Bigger insurance pools typically result in lower premiums for participants, which explains why health insurance coverage provided by employers is often cheaper than individual policies.
Where have you heard about risk pools?
The topic has recently been in the headlines in the US, with the Trump administration's plans to replace the Affordable Health Care Act, aka Obamacare, with high risk health pools for those with chronic illnesses and other "uninsurable" individuals.
What you need to know about risk pools...
A very common practice, especially amongst health insurance and car insurance providers. These companies offset the costs of higher-risk customers (who pay higher premiums) with those of the low-risk customers. Lower risk customers often buy insurance because the costs of car insurance, for example, is still less than the cost of paying for damage to a vehicle out of pocket. Bigger insurance pools usually result in lower premiums, which is why health insurance provided by employers is often cheaper.