What is pooling of risk in insurance?

Answer 1

Pooling of risk is what is also known as the law of large numbers. This is why people purchase insurance. While the risk of having an accident is quite small the financial cost can be very large. So you take many many people let them pay into a fund and pay those who have claims for their loss. This is the same concept as a coop and works the same way. Insurance companies generally don't make hardly anything on underwriting the risk which means they usually pay out about the same as what they take in on premiums. I know this is hard to believe but true. What companies do or hope to do is to make their profits from investing the funds along the way. They generally make a few percentage points on the investment end. Of course, there are years when they loose out all the way around as well.