Risk pooling is a strategy used in insurance and finance where multiple individuals or entities combine their risks to reduce the overall impact of potential losses. By sharing risks, the financial burden of unexpected events, such as accidents or natural disasters, is distributed among all participants, making it more manageable for each member. This concept is fundamental to the functioning of insurance companies, which collect premiums from many policyholders. When a claim arises, the pooled funds are used to cover the loss, ensuring that no single individual bears the full cost alone. This collective approach enhances stability and affordability for everyone involved.