Which of the following best illustrates a proper risk pool example described in the material?

• A. 21-year-olds lumped with 40-year-olds
• B. All adults lumped together regardless of age
• C. Young drivers lumped with older drivers who have accidents
• D. 21-year-olds won't get lumped with 40-year-olds or 21-year olds with no accidents won't get lumped with 21-year olds with accidents

Answer: (D)

Risk pooling works best when groups are built from people with similar risk levels so pricing reflects actual expected losses. The idea is to keep risk characteristics aligned, rather than mixing very different risk profiles.

The option described keeps key risk factors in separate groups: young drivers are not pooled with older drivers, and those with accidents are not pooled with those who have no accidents. This creates more homogeneous pools, which makes premiums fairer and more accurate and reduces cross-subsidization between high- and low-risk individuals.

Other approaches mix clearly different risk levels—lumping by age across broad ranges, pooling all adults regardless of risk, or combining high-risk individuals with low-risk individuals. Such pooling obscures true risk differences and leads to less efficient and fair pricing.