What does 'risk pooling' mean in the context of insurance?

In the context of insurance, 'risk pooling' refers to the concept of grouping many policyholders together to share financial risks. This principle is foundational to insurance, as it allows for the distribution of risk among a large group of people. The idea is that while individual policyholders may face uncertain risks (such as accidents, health issues, or property loss), the insurer can predict overall losses more accurately when pooling together many individuals.

By combining the premiums collected from all members of the pool, the insurance company creates a fund that is used to pay out claims as they arise. This approach not only minimizes the financial impact on any single policyholder but also enhances the insurer's capacity to manage unexpected claims, as the collective pool of resources is typically larger and more stable than any single policyholder's contributions.

The other options do not accurately reflect the concept of risk pooling. Sharing risk across multiple insurance policies does not encompass the idea of grouping policyholders together. Investing premiums into stock markets involves separate financial strategies and objectives, and transferring risk from one insurer to another relates more to reinsurance practices than to the pooling of risks among policyholders.