Which concept refers to distributing potential losses across a large group to reduce individual impact?

• A. Insurance
• B. Adverse selection
• C. Peril
• D. Pooling of Risk

Answer: (D)

Pooling of risk is the idea at play here. By collecting premiums from a large group, losses are spread out so no single person bears a heavy financial blow. The insurer funds claims from the collective pool, and because losses are random but predictable on average across many people, the total cost to the pool stays relatively stable. That stability is what makes insurance premium pricing possible and keeps individual financial exposure manageable.

To connect the other terms: insurance is the mechanism that enables this pooling, but the concept described is the pooling itself. Adverse selection refers to higher-risk individuals being more likely to seek insurance, which can affect the pool’s risk mix. A peril is a specific cause of loss, such as fire or theft, not the act of distributing losses across a group.