What is a key factor that differentiates insurance from other forms of risk management?

The key factor that differentiates insurance from other forms of risk management is that insurance pools risk among many individuals. This means that the financial risk of loss is shared across a large number of policyholders. Each participant pays a premium into the insurance pool, and these funds are then used to pay for the claims of those who experience covered losses. This collective approach helps mitigate the financial burden on any single individual who suffers a loss, making it a unique and effective risk management strategy.

While there are other methods of managing risk—such as avoidance, reduction, and retention—insurance specifically harnesses the power of shared risk to create a safety net for individuals and businesses. By distributing the cost of risk across many insured parties, insurance provides a degree of financial protection that is not achievable through personal savings or other individual risk management techniques.