In short-term insurance such as car insurance you may come across the term pooling. Pooling is actually one of the cornerstones on which insurance is build. When you and millions of other people take out car insurance you pay for the cover you will receive against damage and losses in the form of car insurance premiums.

These premiums are usually payable on a monthly basis. All the premiums paid are collectively called the pool of insurance premiums. From this pool the losses are paid out when insured persons make claims. Another short-term insurance principle is that the contributions of many pay for the losses of few.

Short-term insurance does not operate like an investment where you expect to get your money back, and with interest as well. If you never have claims for a period of three to five years you will qualify for a cash-back bonus – if this is offered by your car insurance company.

From the pool of insurance premiums the insurance company must not only pay out claims it receives but also the running cost to keep the company in operation. There is also a certain percentage of the money in the insurance pool that needs to be kept for reserves in terms of laid down legislation. This is to ensure that there are always sufficient funds in the pool to meet claims.