What does the practice of "risk pooling" in insurance aim to achieve?

The practice of "risk pooling" in insurance is designed to minimize individual losses by spreading the financial risk associated with potential claims across a large number of policyholders. By aggregating many policyholders, the insurer is able to collect premiums from all participants, which creates a pool of funds available to pay for the claims of those who experience losses. This means that the financial burden of a loss is not borne by a single individual, but rather shared collectively among all policyholders.

This method relies on the statistical likelihood of events occurring; while individual losses can be significant, the overall risk can be estimated and managed by the insurer. This system not only helps safeguard the finances of individual policyholders but also allows insurers to provide coverage at affordable rates. Thus, risk pooling is a fundamental concept in insurance, ensuring that protection against losses is both accessible and sustainable for a broad base of clients.