Some people can find themselves suddenly priced out of an insurance market. Homes in areas that are prone to flooding, for example, may face premiums so high that they become effectively uninsurable. Or people predisposed to serious diseases may face health insurance premiums they cannot realistically afford. By making segments of the population effectively uninsurable, accurate risk-based pricing removes the benefit of risk pooling from precisely those who need it most.
Rapidly rising risk and price differentiation raises a policy issue that must be answered. If insurers cannot come up with a good answer on their own, politicians may come up with a bad one for them.
VIDEO: Fady Khayatt, a Paris-based partner in Oliver Wyman’s Financial Services practice, discusses why risk pooling via insurance is under threat.
Moving Toward Mandatory Pooling
The insurance industry is moving towards mandatory pooling to cope with the uninsurable populations created by more accurate pricing, but as the mandatory pool grows, there is less price differentiation. Here's how it works.