Risk pooling is an insurance practice that groups large numbers of people together to minimize the cost impact of the highest-risk individuals. Health, car, home and life insurance all practice risk pooling by insuring people who are unlikely to need insurance to cover the costs of people who are more likely to need insurance.
Risk Pooling in Insurance Basics
Whether insurance is covering health, a car, a home or a life, some people are at greater risk of actually needing the coverage. Most people decide to buy insurance -- even if they have very low risk of death, injury or property damage -- because the cost of insurance is typically less than what it would cost to cover these expenses out of pocket. Some types of insurance -- such as auto insurance -- are legally required. By insuring both low- and high-risk customers, insurance companies can transfer some of the costs of high-risk customers to lower-risk customers, thus reducing the overall cost to the insurance company of insuring high-risk people.
Insurance Coverage for High-risk Policyholders
Although insurance companies frequently insure high-risk people, their coverage might have limits. In health insurance, for example, some pre-existing conditions might traditionally have been excluded. Insurance companies commonly deny coverage to pregnant women and people with mental health conditions unless they have had coverage for a pre-established waiting period. When the Affordable Care Act took effect in 2014, it established a single risk pool for each state. It also prohibits insurance companies from denying coverage to people with pre-existing health conditions.
Higher Risk Equals Higher Insurance Premiums
High-risk people frequently pay more for insurance. This practice rewards low-risk people with lower insurance premiums and ensures that an insurance company gets sufficient money from high-risk people to justify covering their costs should they need to use their insurance. Insurance companies use actuarial tables to determine the risk of an individual based on both her individual choices and data about her demographic group. As a person's risk increases, her costs usually do, too. Life insurance, for example, tends to be more expensive for older people as well as people with significant health risks. Car insurance is often more expensive for teenagers who, statistically, are more likely to get into auto accidents.
Larger Insurance Pools: Lower Risk for Insurance Company, Lower Premiums for Buyers
Larger insurance pools typically result in lower costs, which is why employer-funded health insurance with large companies is often less expensive: The employer can provide the insurer with a large pool of participants and negotiate a lower cost. Car insurance is required for drivers nationwide, which means that risk pools are very large and include drivers with a long history of moving violations as well as drivers who have never received a ticket. The Affordable Care Act, which is designed to make health care accessible and more affordable, began offering government-sponsored health-care exchanges from which individuals, families and small businesses could buy health insurance. These exchanges pool large groups of people together, thus reducing the cost to both buyers and the insurance company.
- National Association of State Comprehensive Health Insurance Plans: What Is a Risk Pool?
- Healthcare.gov: The Health Care Law and You
- ASPE: HEALTH INSURANCE MARKETPLACE: SUMMARY ENROLLMENT REPORT FOR THE INITIAL ANNUAL OPEN ENROLLMENT PERIOD. SINGLE RISK POOL IN EACH STATE
- HHS.gov Healthcare About the ACA
- Healthcare.gov Glossary "Exchange"