What is pooling of risk in the context of insurance?

Pooling of risk in insurance refers to the practice of combining risks from multiple entities, such as governments or organizations, to create a collective fund that can be used to address shared risks. This concept allows for the distribution of financial burdens across a larger group, which can lead to more stable and predictable insurance costs.

When a government enters into an agreement with other governments to share common risks, it is effectively pooling those risks. Each member of the pool contributes to a fund proportionate to their level of risk, and in the event of a loss, costs are covered collectively. This arrangement helps mitigate the financial impact on any single entity and can enhance risk management through shared resources and knowledge.

The other options do not accurately capture the essence of pooling of risk. For instance, determining the risks of insuring a local government pertains more to underwriting processes rather than the pooling concept itself. The optional investments in additional controls refer to risk management strategies that do not relate directly to the concept of pooling risks among multiple stakeholders. Therefore, the correct understanding of pooling of risk comes from the collaborative nature of sharing and managing common risks among multiple parties, which aligns with the selected answer.