Risk Community (Gefahrengemeinschaft)
A risk community is the pool of all persons insured by an insurer against a comparable risk, whose premiums form the basis for the risk equalisation calculated according to the law of large numbers.
Concept
A risk community (Gefahrengemeinschaft) refers to the entirety of persons insured by an insurer against a comparable risk, whose premium payments together form the fund from which losses incurred by individual members of the community are financed. It is thus the fundamental technical and economic prerequisite of the insurance principle: pooling within the collective replaces individual provision for a single case.
How It Works
An individual policyholder’s premium is not based on their actual individual claims experience, but on the statistically expected claims burden of the entire risk community, which can be calculated more reliably under the law of large numbers the larger and more homogeneous the community is. Appropriate risk classification (rating) within the risk community is necessary to avoid distorting adverse selection.
Relevance for Insurance Technicals
The size and homogeneity of a risk community directly affect premium calculation and the necessary level of reinsurance: small or heterogeneous risk communities exhibit greater volatility in claims experience and accordingly require higher safety loadings or stronger reinsurance protection.