Pooling

What Does Pooling Mean?

Pooling is a system in which a large group of people collectively purchase insurance to reduce the cost of coverage. Essentially, the low-risk members of the pool help offset the higher cost of insuring those considered high-risk.

Insuranceopedia Explains Pooling

The simplest way to reduce the cost of insurance payouts was to deny coverage to high-risk applicants. However, the Affordable Care Act prohibits this practice for health insurer, requiring them to cover applicants with pre-existing conditions.

Insurance relies on another economic model: pooling. In this system, the insured are grouped or categorized based on certain characteristics, such as age or location. Although they vary in terms of risk, by pooling their resources, they can obtain a uniform policy that offers affordable coverage, even to high-risk members. The same principle applies outside of health insurance: car insurance rates are also determined by pooled risk characteristics like age, driving record, and ZIP code. Life insurers do the same thing, grouping applicants by factors that affect life insurance premium costs like age, health history, and tobacco use.