A group of 5,000 self-employed professionals each pays a modest contribution into a fund that covers any member's major medical expenses. This arrangement is an example of the risk management technique of:

Why A is correct

Risk sharing spreads the burden of potential losses across a large number of people so that no single participant bears the full cost of a major loss. Each member contributes a small amount, and the pooled funds pay the losses that occur. Insurance itself is the most common form of risk transfer, while pooling arrangements illustrate the sharing technique. Sharing works because only a fraction of the group experiences a loss in any period, thanks to the law of large numbers.

Why the other options are wrong

• B) Avoidance means refusing to engage in the loss-producing activity; the members still face medical risk here.
• C) Retention means keeping the risk individually; pooling distributes it, which is the opposite.
• D) Reduction lowers loss frequency or severity; the fund does not prevent illness, it just finances it collectively.

Memory hook

Sharing = many shoulders carry one heavy load. The pool absorbs what one back cannot.