Definition
The solidarity principle is the normative position that members of a lifetime income pool accept some degree of cross-subsidy among different risk classes in exchange for the broader benefits of pooling, distinguishing pooled arrangements from those that price each member strictly at their individual actuarial value.
Why it matters
Pool design forces a choice between two principles that pull in opposite directions: actuarial fairness, which requires that each member's premium equal the expected present value of their benefits, and solidarity, which permits some cross-subsidy across risk classes in exchange for broader inclusion. The solidarity principle names this choice explicitly. It is not opposed to fairness — it is a different position on the same axis, the axis of how strictly individual actuarial fairness is preserved within a pool.
How it works
The solidarity principle is implemented in pool design through choices about underwriting granularity and risk-class structure. A pool that prices participants in coarse classes — for example, two age bands rather than ten — preserves more solidarity than one that prices in fine-grained classes, because participants whose actual risk profile sits at one end of a coarse class effectively cross-subsidize those at the other end. A pool with completely uniform pricing across all members occupies the maximum-solidarity end of the spectrum; a pool with individualized pricing reflecting each member's specific expected receipts occupies the maximum-fairness end. Real pools occupy positions along this spectrum that reflect the pool's design choices, legal and regulatory constraints, and the participants' shared understanding of what the pool is for.
The principle is normative because it embeds a position on what pools are for. A pool whose only purpose is individual risk management favors actuarial fairness — each participant should receive, on average, what they put in. A pool whose purpose includes broader cohesion goals favors solidarity — the pool absorbs some redistribution across risk classes in exchange for keeping the pool inclusive. Most real-world pooled arrangements embed some position between the two endpoints, shaped by regulation as much as by design choice. US commercial annuities, for instance, typically use coarser underwriting than full actuarial fairness would imply (commonly age and sex but not health status), which produces implicit cross-subsidies from short-lived participants to long-lived ones within priced classes — a partial expression of the solidarity principle.
In practice
For an individual considering a pool, the solidarity-principle question is what cross-subsidies the pool's design embeds, and whether the individual's actual risk profile makes them a net contributor or net recipient of those cross-subsidies. A participant in good health with longer expected lifespan is, under solidarity-favoring pricing, likely cross-subsidizing shorter-lived participants in the same priced class — sometimes substantially. The cross-subsidy is not necessarily a reason to avoid the pool — the structural benefits of pooling may outweigh it — but it is information worth understanding before joining. A professional advising on a pool should be able to characterize the pool's position on the actuarial-fairness-to-solidarity spectrum, because that position affects the realized value any individual member can expect.
In the Longevity Standard Framework
The solidarity principle is supporting vocabulary in the Longevity Standard framework, providing the normative vocabulary for the design choice between strict actuarial fairness and broader pooling solidarity within any pooled arrangement. Pool governance choices about underwriting granularity, risk-class structure, and admission rules are all formal expressions of the pool's position on this spectrum. The frictionless pool benchmark assumes full actuarial fairness within the priced classes — it abstracts away the solidarity question by assuming each premium dollar buys exactly its expected present value of benefits — so departures from the benchmark in real pools reflect both cost-structure features and the pool's chosen position on solidarity. In LS pool design consulting, the solidarity position is an explicit design parameter alongside redistribution rules and adjustment mechanisms.
Related terms
- Cooperative game theory
- Actuarial fairness
- Mutualization
- Pool governance
- Risk pooling
- Adverse selection
- Risk classification
- Homogeneous versus heterogeneous pool