What Is Risk Pooling in Insurance?

by Tom Streissguth; Updated September 26, 2017
Man talking on phone after car accident

A risk pool is a method by which insurance companies control the risk of insuring against catastrophic events or extending insurance to individuals or businesses likely to create sizable claims. If a claim arises from a natural disaster or catastrophic weather event such as a hurricane, the companies spread the losses among all members, and single members of the risk pool are protected from claims so large they would bankrupt the company, leaving their claimants with nothing.

Catastrophic Risk Pools

Insurance claim

Different insurance firms must make an agreement to form a risk pool. The risk pool must cover claims in the same category, such as fire or flood, and in a specific geographic area, usually an entire state. In the event of a natural disaster such as an earthquake or hurricane, the insurance companies participating in the risk pool draw on the assets of the pool, in an amount determined by the agreement, and are protected from paying out hundreds or thousands of expensive claims on their own. Many countries have formed public/private risk pools, with tax revenue going to support the viability of the risk pool joined by individual companies. This arrangements helps private insurers to carry out business in the location and provide more competitive premiums to individual customers.

Auto Risk Pools

Car in driveway

In car insurance, high-risk drivers with a record of accidents or traffic violations are sometimes forced to buy insurance (which is required by law) from an assigned-risk pool. By state laws, insurance companies must accept a certain percentage of these high-risk customers. Most of these risk pools are administered by a public office and a board of insurance company representatives. Rates are set by the state’s department of insurance and vary according to the age, location and driving record of the individual. After a period of three years, those with clean driving records are allowed to return to the private insurance market.

Health Risk Pools

Doctor holding tablet PC talking to patient

A health insurance risk pool is a public insurance program created by state legislatures. These programs can be used by people who have a hard time buying conventional health insurance on their own, due to their low income or serious pre-existing medical conditions. A federal health reform law signed in 2010 allowed for the states to participate in a federal risk pool to benefit the uninsured. In exchange, the federal government will provide aid to the states for their public health insurance programs.

Waiting Period

Health Benefits Claim Form

To discourage potential insurance buyers from waiting until they have a serious medical condition to obtain coverage, most health insurance risk pools impose a waiting period for those with pre-existing conditions. A new federal law allows those who have already had group health insurance within the last 63 days to buy coverage from the risk pool without a waiting period.


female doctor in front of medical group

Premiums are higher for health insurance purchased from a state-operated risk pool, even though this form of insurance is subsidized by taxes or assessments on private insurers doing business in the state. The laws in each state cap the premiums for risk pool health coverage to a certain percentage, from 125 to 200 percent, of the average premium for private health insurance.

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About the Author

Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.

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