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

Debora Zaparova and Sandrine Spaeter

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

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.

Keywords: high risks; insurance; risk loading. (search for similar items in EconPapers)
JEL-codes: D81 G22 G28 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-ias and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2019-33

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