Which concept refers to pooling risk across a large group to diversify losses?

Which concept refers to pooling risk across a large group to diversify losses?

• A. Risk Avoidance
• B. Risk Transfer
• C. Risk Sharing
• D. Risk Reduction

Answer: (C)

Risk sharing through pooling is the idea here. By gathering premiums from many insured individuals, a large pool absorbs the claims of the few who experience losses, so no single person bears a disproportionate burden. The larger the pool, the more the actual losses align with expected losses, thanks to the law of large numbers, which makes pricing and risk more predictable. This concept is about distributing risk across many participants rather than avoiding it entirely or transferring it to one other party, and it isn’t about reducing risk through controls but rather sharing and spreading it.

Risk sharing through pooling is the idea here. By gathering premiums from many insured individuals, a large pool absorbs the claims of the few who experience losses, so no single person bears a disproportionate burden. The larger the pool, the more the actual losses align with expected losses, thanks to the law of large numbers, which makes pricing and risk more predictable. This concept is about distributing risk across many participants rather than avoiding it entirely or transferring it to one other party, and it isn’t about reducing risk through controls but rather sharing and spreading it.