Which term describes risk reduction by sharing financial losses across many individuals?

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

Answer: (D)

Pooling of risk is the idea behind reducing an individual’s exposure by sharing potential losses among a large group. When many people contribute premiums into a common pool, the financial impact of losses is spread out, so no single member bears a heavy burden. The law of large numbers helps make losses more predictable for the group, which supports stable premiums and reliable protection for everyone in the pool. Insurance, as a concept, involves risk transfer to an insurer, but the specific term for spreading losses across many individuals is pooling of risk. Adverse selection refers to higher-risk individuals being more likely to buy coverage, peril is the actual cause of loss, and these describe different ideas than the shared-risk concept.