What insurance principle refers to financial arrangements made to cover risks that are judged likely to cause loss?

The principle that refers to financial arrangements made to cover risks that are likely to cause loss is known as risk pooling. This concept involves the gathering of funds from multiple policyholders who pay premiums into a collective pool. In the event of a loss, the funds from this pool are used to compensate those who have experienced a loss, thereby spreading the financial risk among all members of the pool.

Risk pooling is fundamental to how insurance operates since it allows insurers to manage uncertainty and provide coverage against various perils. By pooling together the premiums of many policyholders, insurance companies can predict the overall risk and set premiums at a level that covers expected losses, operating expenses, and profits.

In contrast, risk management refers to the broader practice of identifying, assessing, and mitigating risks across an organization or individual’s activities. Underwriting specifically deals with the process of evaluating the insurability of a risk, deciding how much coverage to provide, and at what premium. Indemnity is the principle that aims to restore the insured to the same financial position after a loss as they were in before the loss occurred. This emphasizes the purpose of insurance as a safety net rather than a profit-making venture for the insured. Thus, risk pooling directly addresses the financial arrangements inherent in