About Risk Pools

Risk Pool Definition

Risk pooling is a powerful tool that is used in the insurance industry to mitigate risks and make insurance affordable for everyone in the pool. Insureds are put into a group with insureds that face similar risks. Their financial resources are then pooled together to cover an individual member's expenses that arise from specific large, infrequent losses. The fact that the losses have a low probability of occurring is important. If there was a large probability that a major loss would occur to a given insured, the insureds would be better off not being in the pool. The number of large expenses would be so frequent that the resources of the pool would be insufficient to cover everyone's losses without an exorbitant premium.

Municipal Risk Pools

Municipal risk pools cover risks specific to municipalities, covering things like fleets of police vehicles, schools, and the actions of public officials. A board of representatives from member entities governs the actions of a risk pool. Boards usually range in size from the mid-teens to the lower twenties. The costs are typically lower than those from a commercial insurer because risk pools tend to outsource most of the technical work involved with insurance, eliminating most of the overhead that comes with a large corporation. Finally, many funds offer risk management services that cater to municipalities along with insurance.

A Brief History of Risk Pools

In the late 1970s and early 1980s, there was a recession caused by a combination of high oil prices and low interest rates. A struggling stock market meant that investment returns were low, so many insurance companies increased premiums to compensate. Municipalities were hit particularly hard by these increases and started creating self-managed risk pools to protect themselves against risks without the help of commercial insurance providers. The practice flourished and as of 2014 the Association of Governmental Risk Pools (AGRiP) estimates that approximately 80% of municipalities engage in a risk pool for at least some of their insurance needs.