Explain what is meant by pooling of risk?

Pooling of risk refers to the practice of aggregating multiple individuals' or entities' risks to reduce the financial impact of potential losses on any single participant. By combining resources and spreading the risk across a larger group, the overall risk is diminished, making it more manageable and affordable. This concept is fundamental to insurance, where premiums collected from many policyholders cover the losses incurred by a few, allowing for greater financial stability.