ABSTRACT
The private insurance industry has a long tradition of providing individuals and firms with a means of “hedging” against uncertain future financial losses. By paying a “premium” to purchase an insurance policy, the individual or firm transfers the risk (less a “deductible”) to an insurance company which pools the risks of many different policyholders. The total premiums collected must be sufficient not only to cover the company’s losses but also to pay both its business costs and the profits which make it worthwhile to stay in business. To ensure adequate revenue, the company must rely on its ability to predict the aggregate cost and timing of future losses. A special kind of insurance com pany is a risk retention group which is formed by (and provides coverage to) individuals and firms in a common profession or industry.
