ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -In Insurance Terms, risk pooling is the sharing of common financial risks evenly among a large number of people. So, the Capital Markets or here, Insurance companies, take that risk from you in exchange for a regular payment called premium. The company believes the premium is enough to cover the risk.

Detailed explanation-2: -Transfer of risk also is referred to as “spreading the risk:’ because the large losses of a few are distributed through an insurer to a large number of premium payers, each of whom pays a relatively small amount.

Detailed explanation-3: -The two most common risk sharing examples are insurance policies and indemnification clauses in contracts. Insurance policies are the most common risk sharing strategy. A company or individual will purchase an insurance policy from the insurance company that ensures coverage of unexpected loss.

Detailed explanation-4: -Risk Sharing-also known as “risk distribution, ” risk sharing means that the premiums and losses of each member of a group of policyholders are allocated within the group based on a predetermined formula.

Detailed explanation-5: -Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit their own total loss in case of disaster. By spreading risk, an insurance company takes on clients whose coverage would be too great of a burden for the single insurance company to handle alone.