A risk pool is a form of
risk management
Risk management is the identification, evaluation, and prioritization of risks, followed by the minimization, monitoring, and control of the impact or probability of those risks occurring. Risks can come from various sources (i.e, Threat (sec ...
that is mostly practiced by
insurance
Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to protect ...
companies, which come together to form a pool to provide protection to insurance companies against catastrophic risks such as floods or earthquakes. The term is also used to describe the pooling of similar risks within the concept of insurance. It is basically like multiple insurance companies coming together to form one. While risk pooling is necessary for insurance to work, not all risks can be effectively pooled in a voluntary insurance bracket unless there is a subsidy available to encourage participation.
In supply chain management
Risk pooling is an important concept in
supply chain management
In commerce, supply chain management (SCM) deals with a system of procurement (purchasing raw materials/components), operations management, logistics and marketing channels, through which raw materials can be developed into finished produc ...
. Risk pooling 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. The reduction in variability allows a decrease in
safety stock
Safety stock is a term used by logistics, logisticians to describe a level of extra inventory, stock which is maintained to mitigate the risk of stockouts, which can be caused, for example, by shortfalls in raw material availability or uncertainty ...
and therefore reduces average
inventory
Inventory (British English) or stock (American English) is a quantity of the goods and materials that a business holds for the ultimate goal of resale, production or utilisation.
Inventory management is a discipline primarily about specifying ...
.
For example, in the
centralized distribution system, the
warehouse
A warehouse is a building for storing goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are usually large plain buildings in industrial parks on the rural–urban fringe, out ...
serves all customers, which leads to a reduction in variability measured by either the
standard deviation
In statistics, the standard deviation is a measure of the amount of variation of the values of a variable about its Expected value, mean. A low standard Deviation (statistics), deviation indicates that the values tend to be close to the mean ( ...
or the
coefficient of variation
In probability theory and statistics, the coefficient of variation (CV), also known as normalized root-mean-square deviation (NRMSD), percent RMS, and relative standard deviation (RSD), is a standardized measure of dispersion of a probability ...
.
The three critical points to risk pooling are:
# Centralized inventory saves safety stock and average inventory in the system.
# When demands from markets are negatively correlated, the higher the coefficient of variation, the greater the benefit obtained from centralized systems; that is, the greater the benefit from risk pooling.
# The benefits from risk pooling depend directly on relative market behavior. If two markets are competing when demand from both markets are more or less than the average demand, the demands from the market are said to be positively correlated. Thus, the benefits derived from risk pooling decreases as the correlation between demands from both markets becomes more positive.
In government
An Intergovernmental risk pool (IRP) operates under the same general principle except that it is made up of public entities, such as government agencies, school districts, county governments and municipalities. They provide
alternative risk financing
Alternative or alternate may refer to:
Arts, entertainment and media
* Alternative (''Kamen Rider''), a character in the Japanese TV series ''Kamen Rider Ryuki''
* Alternative comics, or independent comics are an alternative to mainstream superh ...
and
transfer mechanisms
Transfer may refer to:
Arts and media
* ''Transfer'' (2010 film), a German science-fiction movie directed by Damir Lukacevic and starring Zana Marjanović
* ''Transfer'' (1966 film), a short film
* ''Transfer'' (journal), in management studies
* ...
to their members through self-funding by particular types of risk being underwritten with contributions (premiums), with losses and expenses shared in agreed ratios. In other words, intergovernmental risk pools are a cooperative group of governmental entities joining together through written agreement to finance an exposure, liability, or risk. Although they are not considered insurance, pools extend nearly identical coverage through similar underwriting and claim activities, as well as provide other risk management services. Pools have many advantages over insurers for their members. Pools tend to protect their members from cyclic insurance rates, offer loss prevention services, offer savings (as they are non-profit organizations and do not lose funds through broker fees), and have focus and expertise in governmental entities that are often not found in insurers.
[Marcos Antonio Mendoza, "Reinsurance as Governance: Governmental Risk Management Pools as a Case Study in the Governance Role Played by Reinsurance Institutions", 21 Conn. Ins. L.J. 53, 55-63 (2014) https://ssrn.com/abstract=2573253]
Intergovernmental risk pools may include
authorities,
joint power authorities,
associations,
agencies,
trusts
A trust is a legal relationship in which the owner of property, or any transferable right, gives it to another to manage and use solely for the benefit of a designated person. In the English common law, the party who entrusts the property is k ...
, risk management funds, and other risk pools.
See also
*
U.S. health insurance risk pools
*
List of disasters by cost
Disasters can have high costs associated with responding to and recovering from them. This page lists the estimated economic costs of relatively recent disasters.
The costs of disasters vary considerably depending on a range of factors, such as t ...
References
{{Insurance
Financial economics
Financial risk management
Insurance