What is the main advantage of spreading risk among many individuals in insurance?

The main advantage of spreading risk among many individuals in insurance is that it helps to reduce the cost of unexpected losses for everyone involved. This principle is rooted in the concept of risk pooling, where the collective contributions of many policyholders are used to pay for the losses of a few. By spreading the risk across a larger group, the impact of any single loss is lessened, making it financially manageable for the insurer and beneficial for the policyholders.

When individuals contribute to a pool, the insurance company can calculate premiums based on the likelihood of claims and the total amount of risk. This ensures that no single person bears the full burden of unexpected losses, which in turn helps keep premiums lower and makes insurance more accessible to a larger population. By sharing the risk, individuals can protect themselves against potentially devastating financial consequences that could arise from unforeseen events.

The other options do not capture the fundamental purpose of risk spreading. Enhancing individual financial returns is not a direct result, as the aim is more about stability and collective risk management rather than individual profit. Securing guaranteed profits for the insurer is unrealistic given the nature of risk in insurance. Limiting insurance options undermines the very goal of diversifying and managing risk effectively, as a wider array of insurance products is