What is the primary purpose of risk pooling in insurance?

The primary purpose of risk pooling in insurance is to share risks and reduce individual exposure. This concept is fundamental to how insurance operates. When a large group of individuals or entities come together in a risk pool, they collectively bear the financial burden of potential losses. By doing so, the risk is distributed among all members of the pool, which means that no single member is solely responsible for covering the entire cost of a loss. This collective sharing of risk enables individuals to access insurance protection at a more manageable cost, as the insurer can use the premiums collected from all members to cover the claims of those who experience losses.

In contrast to risk pooling, the idea of eliminating all risks is unrealistic, as certain risks cannot be entirely removed from existence. Increasing premium costs does not align with the purpose of risk pooling; in fact, effective pooling can often lead to more stable and possibly lower premiums. Lastly, while assessing the likelihood of losses is an important function in the overall insurance process, it does not capture the essence of what risk pooling is designed to achieve. Ultimately, risk pooling aims to make risks more manageable for individuals through collective resources and shared responsibility.