Which insurance concept involves covering risks that an individual or entity cannot afford independently?

The concept that involves covering risks that an individual or entity cannot afford independently is shared risk. In insurance, shared risk is a foundational principle where a group of individuals or entities pool their resources together to mitigate the financial burden associated with unforeseen losses. This collective approach allows members to share the costs of claims, making it more feasible for each participant to handle the financial implications of adverse events, such as accidents, natural disasters, or health issues.

By pooling their resources, participants increase their risk tolerance and financial security, benefiting from lower costs compared to managing risks on their own. This system emphasizes the social and communal aspect of insurance, highlighting how individuals can collectively manage risks that, if faced alone, would be overwhelmingly burdensome.

Self-insurance refers to the practice of setting aside funds to cover potential losses rather than purchasing insurance, which is a very different approach. Risk avoidance involves taking steps to completely evade a risk and thus does not provide coverage for losses. Liability management focuses on reducing or managing exposure to legal liabilities. These concepts differ from shared risk, which is specifically about collaboratively managing and covering financial risks.