What is meant by "pooled risk" in the context of health insurance?

In the context of health insurance, "pooled risk" refers to the practice of sharing the financial risk among multiple policyholders to stabilize costs. This concept is fundamental to how insurers operate, as it allows them to balance the uncertainty of individual health care costs across a larger group of people.

When many individuals contribute to the insurance pool by paying premiums, the insurer can use these funds to cover the health expenses of policyholders who require more care than others. This distribution of risk helps to mitigate the financial burdens that could fall on any single individual. By pooling the risks, insurance companies can set premiums at a level that reflects the overall risk of the group rather than the risk of one individual, which ultimately leads to greater predictability in costs for both the insurer and the insured.

This collective approach to risk management not only helps to lower individual costs but also ensures that there are sufficient resources available to cover unexpected health care expenses, achieving a more stable and manageable system for both insurers and policyholders alike.