The portfolio expands by a factor of 10 from 10,000 to 100,000. The insurance company still expects to lose 1% of homes but because the pool is bigger the actual loss is closer to the 1% expected lossless variation less risk. The objective risk has declined. This makes it possible for the insurance company to charge a fair premium and the pooling of risk enables the insured to pay a premium that reflects the risk of the larger pool.

1. What advantages do insurance companies achieve by many large independent pools of risk instead of a few small ones?

2. What happens to the objective risk if the insurance company expands its portfolio to 1 million insured homes and the expected loss remains at 1% of homes insured?