Historically, economic risk was managed through informal agreements within a defined community. If someone’s barn burned down and a herd of milking cows was destroyed, the community would pitch in to rebuild the barn and to provide the farmer with enough cows to replenish the milking stock. This cooperative (pooling) concept became formalized
in the insurance industry. Under a formal insurance
arrangement, each insurance policy purchaser (policyholder) still implicitly pools his risk with all other policyholders. However, it is
no longer necessary for any individual policyholder to know or
have any direct connection with any other policyholder.