How does an insurance company manage risk among its clients?

An insurance company manages risk among its clients primarily by pooling premiums from multiple clients. This process is fundamental to the insurance model, where numerous policyholders contribute to a collective pool of funds through their premium payments. By aggregating the risks posed by many individuals or entities, the insurance company can ensure that the financial impact of claims is manageable.

When a loss occurs, the costs can be covered by this pool of premiums, thus mitigating the financial burden on any single client. This concept of risk pooling allows insurance companies to maintain financial stability and offer coverage at rates that clients can afford. It also enables them to spread the risk across a large number of clients, which reduces the likelihood of catastrophic losses overwhelming their finances.

The other options do not align with the primary function of risk management in insurance. Providing financial loans does not directly address risk management but rather pertains to lending services. Investing in real estate can be part of an insurance company's overall investment strategy but does not specifically relate to managing risk among clients. Limiting coverage options could potentially reduce an insurer's liability, but it does not effectively manage risk among a broad client base; instead, it may expose policyholders to greater risk. Thus, pooling premiums is the core method utilized to manage collective risk effectively.