Which of these best describes risk pooling?1 pointSick people are more likely to sign up for health insurance, and healthy people will not purchase the policy because this will make the premium more expensiveIf individual events are independent, risk can be decreased by averaging across all of the eventsIf individual events are not independent, risk can be decreased by averaging across all of the events
Question
Which of these best describes risk pooling?1 pointSick people are more likely to sign up for health insurance, and healthy people will not purchase the policy because this will make the premium more expensiveIf individual events are independent, risk can be decreased by averaging across all of the eventsIf individual events are not independent, risk can be decreased by averaging across all of the events
Solution
The best description for risk pooling is: "If individual events are independent, risk can be decreased by averaging across all of the events".
Risk pooling is a practice used by insurance companies to spread financial risk among many stakeholders. In the context of insurance, risk pooling involves combining the risks of many individuals into one risk pool. This way, the risk is spread out among many people, reducing the potential financial impact on any one individual. This is based on the law of large numbers, which states that as the number of independent events increases, the actual results will converge on the expected results. Therefore, by pooling many independent risks together, the overall risk can be reduced.
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