What does 'risk pooling' aim to achieve in insurance?

Risk pooling is a fundamental concept in insurance that focuses on the idea of distributing financial risk among a larger group of individuals or entities. By pooling risk, insurers can aggregate the contributions (premiums) of many policyholders, which provides a buffer against the economic impact of individual claims. This collective approach helps ensure that when claims occur, they can be paid out from the combined resources of the pool rather than relying solely on the financial capability of a single policyholder.

The primary goal of risk pooling is to achieve a more predictable and manageable outcome in relation to potential losses, which allows insurers to set premiums at levels that reflect the overall risk of the group rather than assessing individuals on their own potentially high or low risk. When losses are shared among many participants, it reduces the financial burden on any one member and enhances stability within the insurance system.

This process is essential for creating an effective insurance product that can cover unexpected medical expenses and allows individuals to access necessary services without facing crippling financial losses. It is this principle of spreading risk that underpins the sustainability of insurance as a mechanism to protect individuals in times of need.