What is a fundamental principle behind the operation of insurance?

The fundamental principle behind the operation of insurance is that it redistributes risk among a large group. Insurance functions by pooling resources from many policyholders who pay premiums into a collective fund. This fund is then used to pay for the losses experienced by some members of the group. By spreading the risk across many people, insurance makes it financially manageable for individuals to withstand potentially catastrophic losses that they could not afford on their own.

This principle not only allows insurers to provide coverage for a variety of risks but also enables them to set premiums at a level that is affordable for most individuals. The idea is that while only a small percentage of policyholders will experience a loss in any given period, the collective contributions from all policyholders ensure that sufficient funds are available to cover these losses. Thus, the stability and operational viability of an insurance model hinge on this redistribution of risk.