Risk Pooling

Definition

Health Economics

  • Insurance pools risks. Since the costs of health care can be extremely high, uninsured individuals face possible large losses. By agreeing to contribute a small premium to a common pool held by an insurer for use to compensate whoever actually suffers the loss, individuals may be able to reduce the net costs of risk bearing in a way that increases their welfare. Premiums will normally include elements beyond the expected cost of insured events and their probabilities of occurring in or der to cover the operating costs of the insurer and a return on capital (so-called loading). The advantages of risk pooling may be offset by moral hazard (on this see Manning and Marquis, 1996, 2001).
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