Which term refers to the principle of sharing risk among multiple parties?

Risk pooling is a fundamental concept in insurance and finance where multiple parties come together to share the financial burden associated with potential losses. This term encapsulates the idea that by combining resources and spreading the risk among a larger group, the impact of an individual loss is cushioned for each member of the group. The collective contributions help absorb the costs incurred by any one party, enhancing financial stability and mitigating the risk for all involved.

In the context of insurance, risk pooling allows insurers to maintain a balanced portfolio, as the likelihood of all members suffering losses at the same time is statistically low. This principle not only promotes more affordable premiums for policyholders but also contributes to the overall sustainability of the insurance model by ensuring that funds are available when a claim arises. Through risk pooling, the shared nature of financial responsibility encourages participants to engage in less risky behaviors, knowing that they are part of a larger protective network.