In insurance,
the term "risk pooling" refers to the spreading of financial risks
evenly among a large number of contributors to the program. Insurance is the
transference of risks from individuals or corporations who cannot bear a
possible unplanned financial catastrophe to the capital markets, which can bear
them easily -- at least in theory. The capital markets, meanwhile, are
generally happy to take on risk from individuals and corporations -- in exchange
for a premium they believe is sufficient to cover the risk.
Risk pooling
is essential to the concept of insurance. The earliest known insurance policies
were written some 5,000 years ago, to protect shippers against the loss of
their cargo and crews at sea. Any one of them would be devastated by the loss
of a ship. But by pooling their resources, these ancient businessmen were able
to spread the risks more evenly among their numbers, so each paid a relatively
small amount. Under the Babylonians, those receiving a loan to fund a shipment
would pay an additional amount in exchange for a rider cancelling the loan if a
shipment should be lost at sea.
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