What does the term "pooling of risk" refer to in insurance?

The term "pooling of risk" refers to the combination of risks from multiple policyholders to create a fund for losses. This concept is a fundamental principle in insurance, where many individuals or businesses contribute to a collective pool that is used to cover claims that may arise due to unforeseen events, such as accidents or damage.

This pooling allows insurers to manage and distribute the financial burden of losses more effectively. By aggregating risks from various sources, the insurer can predict the likelihood of claims and set appropriate premium levels, ensuring that they can cover these losses while also remaining financially viable. This large pool of risks diversifies the insurer's exposure, which helps stabilize costs and provides more predictable financial outcomes.

Other options describe concepts related to insurance or risk management but do not accurately define pooling of risk. For instance, sharing risks to reduce overall premiums relates more to risk-sharing arrangements rather than the broader concept of pooling. Risk assessment is essential for determining underwriting terms but is not the definition of pooling. Lastly, a method of preventing claims does not pertain to pooling but rather to loss prevention strategies.