Question

What is meant by the insurance concept that risks are pooled or shared? How does each business benefit from pooling risks? Are there any disadvantages to a business from pooling its risks with others? (typing please, thank you)

Answer 1

The insurance business runs on the concept of pooling risks. Huge number of risks are pooled together and the cost of insurance and losses is distributed between the huge number of businesses which are covered.

The advantage of this is that the business which actually suffers the loss is compensated for much more than what it actually paid for the insurance. Its risk is covered. The disadvantage is that businesses which do not actually suffer any loss end up contributing towards the loss which covers to one particular business. This is in the form of premium paid for insurance.