Risk pool

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A risk pool is one of the forms of risk management mostly practiced by insurance companies. Under this system, insurance companies come together to form a pool, which can 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 that underlies the concept of insurance. While risk pooling is necessary for insurance to work, not all risks can be effectively pooled. In particular, it is difficult to pool dissimilar risks in a voluntary insurance bracket, unless there is a subsidy available to encourage participation. [1]

Insurance equitable transfer of the risk of a loss, from one entity to another in exchange for payment

Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to hedge against the risk of a contingent or uncertain loss.


Risk pooling is an important concept in supply chain management. [2] 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. This reduction in variability allows a decrease in safety stock and therefore reduces average Inventory.

Safety stock is a term used by logisticians to describe a level of extra stock that is maintained to mitigate risk of stockouts caused by uncertainties in supply and demand. Adequate safety stock levels permit business operations to proceed according to their plans. Safety stock is held when uncertainty exists in demand, supply, or manufacturing yield, and serves as an insurance against stockouts.

Inventory goods held for resale

Inventory or stock is the goods and materials that a business holds for the ultimate goal of resale.

For example: in the centralized distribution system, the warehouse serves all customers, which leads to a reduction in variability measured by either the standard deviation or the coefficient of variation.

Warehouse commercial storage building for goods in transit

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 outskirts of cities, towns or villages.

Standard deviation dispersion of the values of a random variable around its expected value

In statistics, the standard deviation is a measure that is used to quantify the amount of variation or dispersion of a set of data values. A low standard deviation indicates that the data points tend to be close to the mean of the set, while a high standard deviation indicates that the data points are spread out over a wider range of values.

In probability theory and statistics, the coefficient of variation (CV), also known as relative standard deviation (RSD), is a standardized measure of dispersion of a probability distribution or frequency distribution. It is often expressed as a percentage, and is defined as the ratio of the standard deviation to the mean . The CV or RSD is widely used in analytical chemistry to express the precision and repeatability of an assay. It is also commonly used in fields such as engineering or physics when doing quality assurance studies and ANOVA gauge R&R. In addition, CV is utilized by economists and investors in economic models and in determining the volatility of a security.

The three critical points to risk pooling are:

  1. Centralized inventory saves safety stock and average inventory in the system.
  2. 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.
  3. The benefits from risk pooling depend directly on the relative market behavior. This is explained as follows: If we compare two markets and when demand from both markets are more or less than the average demand, we say that the demands from the market are positively correlated. Thus the benefits derived from risk pooling decreases as the correlation between demands from the two markets becomes more positive.

In government

Intergovernmental risk pools (IRPs) operate under the same general principle, except that they are made up of public entities, such as government agencies, school districts, county governments and municipalities. Thus, IRPs provide alternative risk financing and transfer mechanisms to their members through self-funding, where particular types of risk are 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, these 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 often not found in insurers. [3]

Intergovernmental risk pools may include, but are not limited to, authorities, joint power authorities, associations, agencies, trusts, risk management funds, and other risk pools.

Voluntary association group of people with shared interests or aims

A voluntary group or union is a group of individuals who enter into an agreement, usually as volunteers, to form a body to accomplish a purpose. Common examples include trade associations, trade unions, learned societies, professional associations, and environmental groups.

A government or state agency, sometimes an appointed commission, is a permanent or semi-permanent organization in the machinery of government that is responsible for the oversight and administration of specific functions, such as an intelligence agency. There is a notable variety of agency types. Although usage differs, a government agency is normally distinct both from a department or ministry, and other types of public body established by government. The functions of an agency are normally executive in character, since different types of organizations are most often constituted in an advisory role—this distinction is often blurred in practice however.

A trust company is a corporation, especially a commercial bank, organized to perform the fiduciary of trusts and agencies. It is normally owned by one of three types of structures: an independent partnership, a bank, or a law firm, each of which specializes in being a trustee of various kinds of trusts and in managing estates. Trust companies are not required to exercise all of the powers that they are granted. Further, the fact that a trust company in one jurisdiction does not perform all of the trust company duties in another jurisdiction is irrelevant and does not have any bearing on whether either company is truly a "trust company". Therefore, it is safe to say that the term "trust company" must not be narrowly construed.

See also

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Pool Re

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Yehuda Kahane is the 2011 recipient of the highly prestigious John S. Bickley Founder's Award for his pioneering and lasting contribution to the theory, practice, and education of insurance and risk management. Kahane is active in both the academic and business areas.


  1. "Wading Through Medical Insurance Pools: A Primer," American Academy of Actuaries September 2006 http://www.actuary.org/pdf/health/pools_sep06.pdf
  2. D.S.Levi,P.Kaminsky,E. Simchi-Levi."Chapter 3: Inventory Management and Risk Pooling"; "Designing & Managing the Supply Chain-Second Edition"(p-66)
  3. 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) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2573253