What is the definition of pooling of risks?

Pooling of risks refers to the practice where a group of individuals or entities come together to share the financial consequences of potential losses. This concept is fundamental in the realm of insurance and risk management. When a pool is created, participants pay into a collective fund, which is then used to cover the losses incurred by any member of the group. This system helps to spread the risk among many participants, reducing the financial burden on any single individual should a loss occur.

The key aspect of pooling is the shared responsibility for losses, making it a cost-effective strategy for managing risks. By distributing the risk across a larger number of people, the impact of individual losses is lessened, allowing for more stable and predictable financial outcomes for all involved. This collaborative approach is a cornerstone of many insurance products and reduces the likelihood of catastrophic financial impacts on any single member of the pool.

While the other options presented may seem related to finance and risk in their own rights, they do not capture the essence of risk pooling. For example, investing in high-risk securities pertains to financial investment strategies rather than a collaborative risk management approach. Similarly, insuring individuals separately does not involve sharing risk amongst a group, and creating a mutual fund for health expenses is a specific financial vehicle rather than