Which of the following statements about the risk pooling is correct?
A) Risk pooling works best if the number of parties involved is small.
B) Risk pooling reduces the standard deviation of the loss distribution.
C) Risk pooling increases the loss probability.
D) Risk pooling can be used to increase the cost of bearing risk.

Question

Quizplus · Accepted Answer

Risk pooling combines the risks of multiple parties, which can reduce the overall uncertainty of the loss distribution and therefore decrease the standard deviation of the losses. A larger number of parties involved in the risk pooling can lead to a more stable and predictable risk distribution. Option A is incorrect because the effectiveness of risk pooling is actually enhanced as the number of parties increases. Option C is false because risk pooling should not increase loss probability but rather it can help in reducing it. Option D is also incorrect because one of the primary motivations of risk pooling is to reduce the cost of bearing risk by sharing the risk with other parties.

Which of the Following Statements About the Risk Pooling Is