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Risk pooling and ruin probability, or why high risks are not bad risks

Author

Listed:
  • Debora Zaparova
  • Sandrine Spaeter

Abstract

The aim of this paper is to show that high risks being bad risks is a misinterpretation. We discuss the role of the risk-bearing capital in the insurance process. In particular, we explicit the link between insurer’s risk, capital, size and composition of an insurance pool. Those parameters have a tangible impact on the insurer’s ruin probability when his size is limited. An additional policyholder may increase the ruin probability, while a specific combination of risk types may produce a significant decrease. Those implications should be considered given the legal requirements relative to the insurer’s insolvency. A strategy that consists in attracting only low-risk agents is not necessarily expedient for an insurer.

Suggested Citation

  • Debora Zaparova & Sandrine Spaeter, 2019. "Risk pooling and ruin probability, or why high risks are not bad risks," Working Papers of BETA 2019-33, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    • Handle: RePEc:ulp:sbbeta:2019-33
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    File URL: http://beta.u-strasbg.fr/WP/2019/2019-33.pdf
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    References listed on IDEAS

    as
    1. Powers, Michael R. & Venezian, Emilio C. & Juca, Iana B., 2003. "Of happy and hapless regulators: the asymptotics of ruin," Insurance: Mathematics and Economics, Elsevier, vol. 32(2), pages 317-330, April.
    2. Nadine Gatzert, 2012. "The merits of pooling claims revisited," Journal of Risk Finance, Emerald Group Publishing, vol. 13(3), pages 184-198, May.
    3. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    high risks; insurance; risk loading.;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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