What is the significance of "risk pooling" in insurance?

Risk pooling in insurance is fundamentally about sharing risk among policyholders. This concept allows insurers to spread the financial burden of potential claims across a large number of individuals or entities. When many policyholders contribute to a pool by paying premiums, the insurer can cover the losses incurred by the few who experience an insured event, such as an accident or a disaster.

This collective approach enables insurance companies to stabilize their operations and manage the uncertainty associated with insurance claims. For example, if only a few individuals in a pool experience a loss in a given period, the cumulative premiums paid by the entire group are typically sufficient to cover those losses, ensuring that no single policyholder faces overwhelming costs.

The other options do not capture the essence of risk pooling. Increasing individual premium costs is contrary to the purpose of pooling, which aims to make insurance more affordable. Reducing the number of policies sold does not align with the principle of pooling because a larger pool helps spread risk more effectively. Lastly, maximizing individual losses contradicts the goal of insurance, which is to mitigate financial risk and provide protection, not to exacerbate potential losses. Therefore, option A accurately reflects the significance of risk pooling in the insurance industry.