Risk pool
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Risk Pool is one of the forms of risk management mostly practised by insurance companies. Under this system, insurance companies come together to form a pool, which can provide protection to insurance companies against catastrophe risks such as floods, earthquakes etc.
It is also often used as a name, mainly in norfolk, given to swimming pools which are considered dangerous, either with one or more creatures which are capable of harming humans, or containing a Waterborne disease such as cholera.
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Risk pooling is an important concept in supply chain management. Risk pooling suggests that demand variability is reduced if one aggregates demand across locations because, as we aggregate demand across different locations, it becomes more likely that high demand from one customer will be offset by low demand from another. This reduction in variability allows a decrease in safety stock and therefore reduces average inventory.
For example: in the centralized distribution system, the warehouse serves all customers, which leads to a reduction in variability measured by either the standard deviation or the coefficient of variation.
The three critical points to risk pooling are: 1. Centralized inventory saves safety stock and average inventory in the system 2. The higher the coefficient of variation, the greater the benefit obtained from centralized systems; that is, the greater the benefit from risk pooling. 3. The benefits from risk pooling depend on the behavior of demand from one market relative to demand from another.
