why is it important for insurance companies to have a large risk pool of people paying premiums?

It is important for insurance companies to have a large risk pool of people paying premiums because a large risk pool allows the insurer to spread the financial risk of claims across many policyholders. This pooling of risk helps stabilize premiums, making them more predictable and affordable for everyone in the pool. With more participants, especially a balanced mix of low and high-risk individuals, the insurer can better manage claims and payouts without facing financial strain or needing to drastically raise premiums. Additionally, a large risk pool enables insurance companies to offer more competitive plans with broader coverage and benefits since the risk is diffused over a wider customer base. This overall risk distribution and premium stabilization are fundamental to maintaining the financial health and sustainability of insurance companies.