Loss Prevention or Loss Reduction in Risk Pools?

Risk might be structured by the probability of loss and the magnitude of loss. In general a risk-averse individual wants to reduce risk by decreasing the probability, magnitude of loss or both. In this paper we have examined a risk-averse individual's choice between loss reduction and loss prevention activity in two situations: when a risk pooling arrangement or market insurance is not considered and when a risk pooling arrangement is available. A risk-averse individual's preference of loss reduction over loss prevention has been clearly showed unlike the approximation by Boyer and Dionne (1983). Under a risk pooling arrangement, it has been shown that a risk-averse member always prefers loss reduction to loss prevention in the same manner.