What is the main purpose of pooling in the context of insurance?

Pooling is a fundamental concept in insurance that serves to effectively manage risk across a group of individuals or entities. The main purpose of pooling is to gather together multiple policyholders' risks so that they can share the financial burden of unexpected losses. When individuals pay premiums into a common fund, they are collectively covering potential claims that might arise, thereby diversifying and transferring risks among the group.

This shared risk system is beneficial because it allows for the calculation of premiums based on the overall risk profile of the group rather than on the risk of individual members. By spreading risks, insurance companies can provide coverage at a more manageable cost for all insured parties, even for those who may be considered higher risk.

In contrast, other options do not capture the essence of pooling. While competition among insurance providers is important for the market, it does not directly relate to the concept of pooling as a mechanism for risk management. Similarly, increasing premiums for higher-risk individuals or limiting claims from high-risk members speaks to underwriting practices and claims management, rather than the fundamental operation of risk pooling in insurance.