Working Paper BETA #2019-33

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

Author(s) : Debora Zaparova, Sandrine Spaeter

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.

Key-words : high risks, insurance, risk loading

JEL Classification : D81, G22, G28