I am confused by one of the answers to this past paper question in the revision booklet (p173 in the latest version for the 2022 exams). One of the disadvantages to option 1 (focus on flood risk reduction) is given as "if insurers move to more accurate premiums for each individual risk, it goes against the pooling principle of insurance". This particular point does not appear in the examiners solutions and I don't really understand the logic of it. It seems to be saying that if you increase the reflectiveness of risk in pricing you are moving away from the pooling principle? But the reverse of that would imply that a single 'flat' premium for all risks complies the most with the pooling principle (whereas I'd argue that you'd end up with one big pool of heterogenous risks which therefore doesn't reduce the variance.... which was meant to be the whole point of pooling risks).
The point here is a disadvantage from the perspective of the insureds (not the insurers). If insurers move to more accurate premiums for each individual risk then the premiums for high-risk properties will get closer to the true cost of the risk meaning that some properties might become uninsurable.
