What is an example of risk pooling in risk management?

Risk pooling in risk management refers to the practice of combining resources from multiple contributors to create a shared fund that can be used to cover losses incurred by any member of the group. This concept is fundamental in insurance, where individual policyholders pay premiums into a common pool. When a covered event occurs, the funds are drawn from this pooled resource to compensate the affected parties.

Creating a shared fund for losses exemplifies risk pooling because it emphasizes collective participation in risk management. Members collectively share the financial burden of losses, which reduces the individual financial impact on any single member when a loss event occurs. This collaborative approach allows risks to be managed more effectively over a larger base, effectively spreading the risk among all participants.

In contrast, the other options highlight individual approaches to risk management. Buying insurance individually does not involve pooling resources, as each person is solely responsible for their own policy. Avoiding all potential risks is not practical or effective in risk management, as it is impossible to eliminate all risks. Accepting all risks personally places the entire burden on an individual, contrary to the concept of shared responsibility that underpins risk pooling.