What do individuals use to transfer their risk of loss to a larger group?

Individuals use insurance to transfer their risk of loss to a larger group. This mechanism allows individuals to pay a relatively small premium in exchange for a promise that, in the event of a loss, they will receive financial compensation from the insurance company. The core principle here is risk-sharing; premiums collected from many policyholders are pooled together to cover the losses of the few who experience them. This arrangement provides financial security to individuals, as they are no longer solely responsible for substantial losses, and instead share that burden with a larger community.

Insurance is specifically designed to handle unpredictable events and provides a structured way of managing financial risks. Through a contractual agreement, policyholders gain peace of mind knowing that they will have resources available if they face damages, accidents, or other covered events.

While hedging, bonding, and pooling have their own applications in risk management and financial strategies, they do not focus on the principle of transferring personal risk to a larger group in the same way insurance does. Hedging primarily relates to the financial market and strategies for reducing potential losses in investments, bonding typically applies to guarantees in contracts, and pooling refers to the broader concept of combining risks, but does not encompass the same protective financial arrangement that insurance offers.