An insurance pool comes into existence when several insurance companies share information about historic payout rates and create communal insurance funds from which high risk insurees receive payouts. In the absence of insurance pools, people who are seen as high risk insurees are often unable to obtain insurance protection. An insurance pool generally focuses on providing one type of coverage, such as health insurance, but sometimes insurance pools sell a variety of different insurance products.
Insurance companies make money by pricing insurance premiums in such a way that the premium payments made by insurees will more than cover the cost of insurance payouts. Actuaries study historical data related to past events to calculate the statistical probability of future claims being made. Despite the general reliability of payout predictions, unusual events occasionally occur and result in larger than expected payouts. Based upon historic data, some groups of people and some businesses are viewed as too high risk to insure because data suggests that it would be too costly for an insurance company to provide coverage for these groups and entities.
Historically, insurance companies could choose who to insure and not insure, and insurance coverage was only provided to low risk insurees. In recent decades, many national governments have passed legislation that requires insurance companies to insure so-called high risk insurees. Many insurance pools are government sponsored, and in some instances this benefits the insurance companies because the government assumes some of the financial risk. With or without government involvement, each firm inside an insurance pool assumes a small degree of risk, which means the insurance companies are less likely to have financial problems when significant numbers of claims are made.
High risk insurees have to pay higher than average insurance premiums, which means that providing high risk insurance can be quite lucrative for the firms inside the insurance pool. An individual company could make even more money by insuring the high risk insurees without being involved in the pool, but the risks are too great to take on the insurance outside of a pool. When companies pool together, the firms involved have more access to potential clients because the pool can reach all of the clients who are otherwise served by regionally based insurance firms.
Insurance companies, individuals, and business all benefit from insurance pools. People with serious medical issues are often unable to obtain health insurance, while homeowners in flood or earthquake zones are often unable to acquire homeowners insurance. An insurance pool provides these people with some financial security and peace of mind. Insurance pools also lessen the financial burden on governments after catastrophes, such as hurricanes and tornadoes, that occur in high risk areas.