How does pooling benefit insurance companies?

Pooling benefits insurance companies by minimizing risk through group coverage. This concept relies on the principle that by aggregating a large number of policyholders, the insurer can predict overall claims more accurately. Each individual policyholder contributes to a shared risk pool, which helps to mitigate the uncertainty associated with insuring individuals who might have higher health risks or other potential claims.

When insurance companies pool risks, they benefit from the law of large numbers, which states that as the size of the group increases, the expected outcome (in terms of claims) becomes more predictable. This enables the insurer to set premiums at appropriate levels that reflect the overall risk of the covered group rather than relying on the risk profile of a single individual. Thus, pooling helps to stabilize costs for the insurance company and allows them to offer competitive pricing while maintaining profitability.

The other options do not accurately reflect the fundamental advantage of pooling. Increasing individual premiums would not inherently benefit the insurance company if it doesn't correspond to a reduced risk. Simplifying customer service is not a direct benefit of pooling, as customer service complexities can still exist regardless of risk pooling. Limiting the number of policyholders also contradicts the premise of pooling, as an increased number of policyholders enhances risk spreading and minimizes uncertainty.