One of the main reasons that insurance works as a financial…

One of the main reasons that insurance works as a financial instrument is the due to the concept of risk pooling. From the perspective of the individual loss exposure (either a person or a firm): If an individual person or individual firm joins a risk pool > the overall risk faced by that individual person or individual firm = [option1]   However, from the perspective of the insurance company:  As more and more individual loss exposures are added to the insurance company’s risk pool > The overall risk faced by the insurance company (as measured by the coefficient of variation) =[option2]