What provides a risk transfer mechanism by means of a common pool into which each policyholder pays a fair and equitable premium?

The correct answer is insurance because it represents a system designed specifically for transferring risk between individuals and a collective pool. In an insurance arrangement, policyholders contribute payments, known as premiums, into a common fund. This fund is then used to compensate individuals who experience covered losses, thereby distributing the financial burden among a larger group.

Insurance operates under the principle of risk pooling, allowing policyholders to share the risks associated with potential losses. By paying a fair and equitable premium, each participant benefits from the collective security provided by the insurance pool. This structure ensures that the financial impact of a loss is mitigated for any individual, as they are not solely responsible for the full cost associated with their potential risks.

Contribution relates to the idea that parties may share expenses when they are responsible for the same loss, but it does not encompass the aspect of a common pool funded by premiums for collective risk coverage. Indemnity refers to compensating a loss after the fact on a one-to-one basis rather than through a pooled approach. Risk management broadly encompasses a range of strategies to mitigate risk but does not specifically denote the mechanisms involved in sharing risk through premium contributions.